contingency and contracts: a philosophy of complex

DePaul Law Review DePaul Law Review

Volume 54 Issue 4 Summer 2005 Article 4

Contingency and Contracts: A Philosophy of Complex Business Contingency and Contracts: A Philosophy of Complex Business

Transactions Transactions

Jeffrey M. Lipshaw

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CONTINGENCY AND CONTRACTS: A PHILOSOPHYOF COMPLEX BUSINESS TRANSACTIONS

Jeffrey M. Lipshaw*

We proceed on the assumption that the true and the good, and justpossibly the beautiful, coincide. Where they do not, we demand anaccount. The urge to unite is and ought stands behind every creativeendeavor. Those who seek to unite them by force usually do moreharm than they set out to prevent. Those who never seek to unitethem do nothing at all.1

A purely stable world permits of no illusions, but neither is it clothedwith ideals. It just exists. To be good is to be better than; and therecan be no better except where there is shock and discord combinedwith enough assured order to make attainment of harmony possible.2

INTRODUCTION

The prevailing literature on contract theory does not adequately ad-dress the way real world lawyers address uncertainty in complex busi-ness transactions. I attribute this to the constraints imposed bythinking in legal models, the dominant tendency to turn to economicsfor analysis and normative prescription, and the focus on adjudicativeissues of hindsight interpretation. The behavior of lawyers and busi-ness people in the course of complex commercial transactions and re-

* Adjunct Professor, Indiana University School of Law-Indianapolis; Senior Vice President,

General Counsel & Secretary, Great Lakes Chemical Corporation. A.B., 1975, University of

Michigan; J.D., 1979, Stanford University. I wish to acknowledge the following individuals for

their encouragement, comments, and constructive criticism: Susan Neiman, Richard Posner,

Linda Ross Meyer, Daniel Cole, Jonathan Cohen, Jeffrey Liss, Susannah Mead, and AleneFranklin.

1. SUSAN NEIMAN, EVIL IN MODERN THOUGHT 322 (2002). Prefacing with a quote from a

book about evil is not as far-fetched as it may seem. Neiman's work is a revisionist history ofmodern philosophy, arguing that a meaningful understanding of the great thinkers since the

Enlightenment can be based on how they approached the question: Why is it that things in theworld go very, very wrong? Coming to terms with great natural or moral evils, like the Lisbon

earthquake or the Holocaust, respectively, is for philosophers like Neiman. Business lawyers

rarely deal with true evil (although we may feel that way in the twentieth hour of a day with a

tough adversary). We deal with more mundane things going inexplicably wrong, like the lenderreneging on its commitment out of the blue, or the stock market crash of October 1987 causing

an acquisition to fall through. Nevertheless, the same philosophy can be instructive. That is thelesson of this Article.

2. JOHN DEWEY, EXPERIENCE AND NATURE 62 (1929).

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lationships suggest homo economicus is not the only model of humanbehavior, even in economic relationships: This is particularly true incomplex business transactions, like merger and acquisition (M&A) orventure capital work. 3

Commercial uncertainty, and the law's response to it, is only a sub-set of the broader philosophical issue of contingency. How the lawand lawyers deal with transactional uncertainty is merely a subset ofhow we as human beings come to terms with the uncertainty of theworld, individually or socially. When we write contracts, we deal withcontingent events, those with "[t]he property of not having to occur."' 4

Some scholars have recognized that the law of contracts is not theonly way business people may attempt to deal with contingency. 5

Very few have tried to address it as a matter of philosophy. I amneither a professional economist nor a philosopher, but I will never-theless try to answer Martha Nussbaum's call to link the real world ofdealmaking to historic sources of philosophy and jurisprudence. 6

First, I will counter those current thinkers who believe, like some oftheir philosophical forebears, that they have found the one predomi-nant way of thinking about the world. Second, this Article suggests, inthe philosophical tradition, alternative cross-disciplinary contexts forlaw and lawyers. Finally, I suggest a role for lawyers in completingdeals that invokes a (perhaps unscientific) pragmatic idealism.7

3. In other contexts, see Jeffrey M. Lipshaw, Sarbanes-Oxley, Jurisprudence, Game Theory,Insurance and Kant: Toward a Moral Theory of Good Governance, 50 WAYNE L. REV. (forth-coming 2005) (manuscript at 33-41), available at http://ssrn.com/abstract=576761 (discussing howcorporate board responses to Sarbanes-Oxley and the nature of board service suggest, from thestandpoint of philosophy, that directors respond to law, economics, and morality simultaneously,notwithstanding the contradictions that may exist among them); Lynn A. Stout, In Praise ofProcedure: An Economic and Behavioral Defense of Smith v. Van Gorkom and the BusinessJudgment Rule, 96 Nw. U. L. REV. 675, 683-87 (2002) (noting that rational actor assumptions ofeconomic analysis fail to account for "other-regarding" or altruistic behavior on corporateboards, and observing how unfashionable it is to account for behavior with notions of responsi-bility, obligation, or honor).

4. ANTHONY FLEW, A DICTIONARY OF PHILOSOPHY 74-75 (2d ed. 1999).5. See generally, e.g., ERIC A. POSNER, LAW AND SOCIAL NoRMs (2000); David Charny, Non-

Legal Sanctions in Commercial Relationships, 104 HARV. L. REV. 375 (1990); Stewart Macaulay,An Empirical View of Contract, 1985 Wis. L. REv. 465 [hereinafter Macaulay, Empirical View];Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 AM. Soc.REV. 55 (1963) [hereinafter Macaulay, Non-Contractual Relations]; Mark C. Suchman, The Con-tract as Social Artifact, 37 LAW & Soc'Y REV. 91 (2003).

6. Martha C. Nussbaum, Flawed Foundations: The Philosophical Critique of (a Particular Typeof) Economics, 64 U. CHI. L. REV. 1197, 1214 (1997).

7. When I refer to "moral philosophy" in this Article, I am generally not referring to norma-tive ethics-how we should behave in a particular circumstance. I am more concerned with thataspect of philosophy, also referred to as "moral philosophy," that is "not directly concerned withthe content of any particular form of moral life, whether real or imaginary, but with what thegeneral logical rules of any morality or any moral argument ... must be." FLEw, supra note 4, at

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One repeating pattern in the history of ideas is the attempt, futile inmy view, to explain away all contingency, or on the other hand, tothrow up one's hands and conclude that the urge to explain it away, oreven to see order in the chaos, is misplaced mysticism, an accident ofbiology, or the residue of something too spicy we ate for dinner. Un-derstanding the persistence of contingency in all its forms, without giv-ing up, may be the single most important thing lawyers can bring toleadership. Nevertheless, the body of American philosophy most as-sociated with the problem of contingency, the pragmatism of WilliamJames and John Dewey (also associated with the legal pragmatism ofJustice Oliver Wendell Holmes, Jr.), has been co-opted by jurispru-dential scholars who would remove moral philosophy as a legitimatesource of thought about lawyers and their place in society, much lesscomplex commercial interactions, and replace it with what purports tobe science.8

Lawmakers rely on a model of law as regulator of behavior-just aseconomists model the rational actor, sociologists model the relation-ship of individuals and groups, or psychologists model the workings ofthe mind. Disinterested observers would likely suggest the worth of amodel is its ability to predict and explain real world behavior; nomodel is a perfect representation of the real world, and some truth nodoubt underlies each.

I will now broaden the inquiry with a philosophic assessment of thespirit and manner in which we construct and advocate the modelsthemselves, particularly as they affect working lawyers, in the blackversus white, good versus evil, us versus them of today's political andintellectual milieu. The history of ideas is nothing if not a dialectic offaith and skepticism, experience and reason, contingency and deter-minism, the community and the organization-all models intended tomake sense of the world. Yet it is testimony to our species' shortmemory or persistence that these dichotomous models are either rec-onciled or rediscovered in every generation.

112-14. I am also seeking to obtain a better explanation of what moves us in a particular circum-stance, and with that explanation, suggest ways to guide our practical action.

8. I have in mind the view of some within the law and economics movement that reputation,trust, and goodwill are economic goods-the value of which homo economicus may, in thecourse of rational calculation, seek to maximize. See, e.g., POSNER, supra note 5, at 191-92.Professor Eric Posner emphasizes

that because sometimes a person's principled claims will constrain his behavior, theperson will cheat less often (though he will cheat if the payoff is high enough) than he

would if he did not make principled claims. Therefore, claims to be principled actuallymay produce social benefits-by reducing the amount of cheating-even though theydo not ensure or reflect principled behavior.

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The very nature of how we reason about those dichotomies has led,paradoxically, to our present incarnation of conflicting certainties. Ina phrase common to lawyers-it takes very little for our reason tohave us sliding down a slippery slope, whether or not there ever was ahill. Against the "either-or" to which our reason tends, leadership inlaw or business (and one hopes in politics) entails understanding thedifference between the use of reason on one hand, and being reasona-ble on the other. In the real and practical short run, as problem-solv-ers and advocates, we must find answers, resolve hard cases, fire andhire, and satisfy Wall Street's expectations. But, with apologies toRobert Louis Stevenson, as leaders and policymakers, we are ulti-mately better off traveling hopefully than deluding ourselves that wehave arrived.9 Perfectability can be worse than a myth; believing it isachievable may be a disease. Even the current proponents of a formof legal pragmatism (e.g., Judge Richard Posner), unlike their philo-sophic forebears, fall into this trap. They no longer espouse even ahealthy agnosticism about moral philosophy as a guide; they are cer-tain it is bankrupt.10

I do not intend to demonstrate, for example, that there are no in-sights from economic analysis of law in the world of complex deals.Indeed, I believe it is a fundamental truth that people act in their owninterest, and that as to aspects of the deal process, they are primarilyrational actors. But I also believe it is a fundamental truth that some-thing compels us to regard others with a sense of honor, obligation,and responsibility. What I will argue is that both truths are apparenton a regular basis, regardless of the governing law or rational actoreconomics in complex commercial arrangements. Human beings donot check at the office door their impulse to find ways to make senseof why things go wrong in the world and to impose order on thechaos-whether through contract, personal relationships, self-decep-tion, economic analysis, or moral philosophy. Contracts are one wayto deal with contingency. Submitting disputes to a judge when we dis-agree is another. Neither is exclusive.

9. "To travel hopefully is a better thing than to arrive." Quotations by Author, The Quota-tions Page, at http://www.quotationspage.com/quotes/RobertLouisStevenson/ (last visitedMar. 31, 2005).

10. As Martha Nussbaum has noted, Aristotle had only a qualified belief that conceptualthought progressed over time:

Aristotle also noticed . . . that the passion for science and simplicity frequently leadhighly intelligent people into conceptual confusion and an impoverished view of thehuman world. So he did not think that progress was inevitable, and one of his greatarguments for reading was that it could remind us of conceptual complexities we mightotherwise efface, in our zeal to make life more tractable than it is.

Nussbaum, supra note 6, at 1214.

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Ironically, the pragmatic impulse (like Judge Posner's) stems fromthe same fully understandable aversion to absolutism that motivatedKant's treatment of-but refusal to reject-idealism. The philosophi-cal pragmatists (James, in particular) thought:

[T]hat the mistake most people make about beliefs is to think that abelief is true, or justified, only if it mirrors 'the way things reallyare'-that (to use one of James's most frequent targets, Huxley'sargument for agnosticism) we are justified in believing in God onlyif we are able to prove that God exists apart from our personal be-lief in him."'

In the trenches where law intersects with complex business, wherelittle is adjudicated but much is accomplished, the pragmatists areright: Permitting the dictatorship of a single idea over the use of com-mon sense to get things done is the bane of every businessperson whohas said to a lawyer, "all you tell me is 'no." 12 But I argue for some-thing more. Understanding how people respond-seeing them, inKant's articulation, as ends and not means13-and having vision ortrust when the formula of the legal documents will not suffice hasvalue in the world, and hence is true, regardless of whether it is mea-surable. I believe measurable and incommensurable ideas have value.It is simply a better world when we acknowledge both. Leaders wewant to encourage will recognize it; so will lawyers who get dealsdone. Posner's "pragmatic skepticism" gets two-thirds of the way

11. Louis MENAND, THE METAPHYSICAL CLUB 356 (2001).

12. Some law and economics scholars recognize at least the perception of the empirical obser-

vation, if not what I will suggest are its philosophical roots. One such article argues that "[tihe

tension between lawyers and business people is part of the folklore. Lawyers complain that

business people do not plan carefully enough against future contingencies; business people com-plain that lawyers' caution interferes with valuable deals." Karen Eggleston et al., The Design

and Interpretation of Contracts: Why Complexity Matters, 95 Nw. U. L. REV. 91, 126 n.102 (2000);

see also JAMES C. FREUND, ANATOMY OF A MERGER 4 n.1 (1975). Freund notes:

A recent advertisement appearing in The Wall Street Journal for a book entitled WIN-NING THROUGH INTIMIDATION contained the following text: "Have you ever had a dealblow up solely because of an attorney? ... [Y]ou must face the reality that attorneys

have been, are, and, unfortunately, probably always will be a major obstacle in justabout every significant business transaction that takes place.... [Y]ou must developspecific techniques.., for protecting your flanks from the deal-killing expertise of the

other side's attorney."

Id.; see also Mike France, A Compelling Case for Lawyer-CEOs, Bus. WK., Dec. 13, 2004, at 88

("Business attorneys are often considered the 'vice-presidents of No,' says Jeffrey A. Son-

nenfeld, associate dean of executive programs at Yale School of Management.").

13. "[T]he fundamental principle of all maxims of action must be that the subject of all ends,

i.e. the rational being himself, be never employed merely as means, but as the supreme conditionrestricting the use of all means, that is in every case as an end likewise." IMMANUEL KANT,

Fundamental Principles of the Metaphysics of Morals, in BASIC WRITINGS OF KANT 144, 195(Allen W. Wood ed., 2001).

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there by rejecting absolutism and focusing on real world results,14 butfails to account for that slippery and probably incommensurable thingwe sense as vision or leadership.

In Part II, I summarize significant cross-disciplinary approaches tolegal contingency (or uncertainty) in commercial contexts-economicand societal-and point out their implications for working lawyers.Neither economic theories of optimum risk allocation (the Coase the-orem) nor strategic behavior are particularly helpful to dealmakers,other than in limited circumstances where rational behavior can bepresumed. The law and society movement aptly characterizes the lim-ited role of contract in commercial behavior, but offers no practicaladvice. I further offer philosophy, and particularly the contrastingviews of Hume, Kant, and the American pragmatists (James andDewey) as an alternative and generally disregarded discipline thatmay provide insight into the creative process of making a deal.

In Part III, I outline particular examples of contingency in the nego-tiation of complex acquisitions or venture capital start-ups, and cri-tique a prevalent view of the role of moral philosophy in the law-Richard Posner's "pragmatic skepticism" and his rejection of the ap-plication of any universal moral standards to the law. I also contrastthat skepticism with the empirical evidence in the literature of modernbusiness management and leadership that people do respond in viscer-ally utilitarian environments to non-utilitarian appeals. I suggest thatthere are both utilitarian and non-utilitarian reasons for a return tothe fashion of assessing not just the economic, but the philosophic ba-sis of behavior. Finally, I make some normative proposals and setforth two (not so) hypothetical situations, suggesting that deal lawyerswould be well served by at least studying, if not adopting, a philoso-phy of pragmatic idealism.

II. THE RELATIONSHIP OF CONTINGENCY, LAW, AND PHILOSOPHY

TO COMPLEX COMMERCIAL RELATIONSHIPS

A. Cross-Disciplinary Views of Contingency inComplex Transactions

When we make a promise, or enter into a contract, we are lookingforward and seeking to reduce contingency. 15 I can only guess what

14. See generally RICHARD A. POSNER, LAW, PRAGMATISM, AND DEMOCRACY (2003).15. In ordinary usage, uncertainty and contingency are equivalent. The dictionary defines con-

tingency as "something whose occurrence depends on chance or uncertain conditions; a possible,unforeseen, or accidental occurrence." WEBSTER'S NEW WORLD DICTIONARY 301 (3d Coll. ed.1988). In this Article, I use the term "contingency" because of its philosophical connotations.

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the price of wheat or the value of the Euro will be in ninety days, butwhen I contract with you to buy wheat or Euros, I have dealt withcontingencies that might occur: Severe weather that wipes out most ofthe wheat crop, or an unanticipated interest rate hike by the Euro-pean central banks.

What are the contingencies that contracts attempt to address in acomplex transaction? The sale agreement for an ongoing multi-billiondollar business may contain dozens of representations and warranties(which to one degree or another must be materially true at the time ofexecution and closing), pre-closing covenants, conditions to closing,and post-closing covenants and indemnifications. 16 Conditions toclosing not in the direct control of the parties might include the ab-sence of an injunction or restraining order, the obtaining of consentsto the assignment of material contracts, licenses or permits, competi-tion law clearances, other governmental approvals (such as foreign in-vestment filings), securing of financing, and depending on how theclause is drafted, no material adverse change in the business itself orin conditions surrounding the business. 17 In a leveraged buyout withsyndicated financing, the loan agreement may typically run to a hun-dred pages, with dozens of representations and warranties, affirmativeand negative covenants, conditions to the initial closing, and subse-quent cash advances. 8

The world of start-up businesses and venture capital is almost de-fined by contingency.19 The fundamental document in a venture capi-tal transaction is the term sheet: It summarizes the financial and legalterms and conditions of the deal, and serves as the basis for the morecomplex agreements to come-for example, preferred stock terms,loan agreements, and shareholder agreements. 20 The term sheet willcover the rights and duties of the entrepreneur and investor as to

16. See, e.g., Asset Purchase Agreement Dated as of February 29, 1996 Among Robert BoschGmbH and the Other Purchasers Named Herein and AlliedSignal, Inc. and the Other SellersNamed Herein, filed with Form 8-K (Apr. 12, 1996), available at http://www.sec.gov/Archives/edgar/data/773840/0000773840-96-000005.txt. This deal involved AlliedSignal's sale of the Ben-dix brake business to Bosch for $1.5 billion. The deal involved assets in nine countries and sevenstates.

17. Id. at 44-46.18. See, e.g., U.S. $36,500,000 Loan Agreement Dated as of February 2, 1990 Among Automo-

tive Plastic Technologies, Inc. as Borrower, the Lenders Named Herein as Lenders and GeneralElectric Capital Corporation as Agent and Lender (on file with the DePaul Law Review).

19. CONSTANCE E. BAGLEY & CRAIG E. DAUCHY, THE ENTREPRENEUR'S GUIDE TO BusI-

NESS LAW 3 (2003) (stating that "[miost entrepreneurs and their backers are not risk seekers;rather they are risk takers who attempt to manage the risks inherent in pursuing new opportuni-ties by making staged commitments and conducting a series of experiments" (footnoteomitted)).

20. ALEX WILMERDING, TERM SHEETS AND VALUATIONS 7 (2003).

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rights, preferences, and privileges of preferred stock, liquidation pref-erences, redemption, conversion, dilution in the event of future invest-ment, voting, board composition and information rights, stockregistration rights, rights of first refusal, stock options, and many othermatters.21 As we will see, in the jargon of economists and game theo-rists, what these transactions (and their governing contracts) have incommon are repeated outcomes (the players encounter each otherover and over again)22 and "insufficient[ ] state contingen[cies]" (thecontracts do not completely address all of the possible future states ofthe world). 23 The more varied and more repeated the outcomes arebetween beginning and end, the more risk and contingency the trans-action will contain. The number of fixed contractual resolutions, suchas redemption or conversion options in preferred stock, or deferredcontractual resolutions (e.g., agreements to negotiate later in goodfaith, requirements of consent "not unreasonably to be withheld," anddeliberate ambiguity), are as unlimited as the ingenuity of lawyers andtheir clients.

1. The Law and Economics Approach

a. Efficiency

The law of contracts is concerned with enforcing entitlements (le-gally protected rights) that arise betWeen parties that have obligatedthemselves to each other by promise.24 Certainly the most volumi-nous body of scholarship within the "four corners" of contract law isthe work attempting to assess contract law in light of economic the-ory.2 5 One use of economic analysis is to design rules of adjudicationthat maximize social welfare in the event of a dispute (absent agree-

21. Id. at 31-81.22. Eggleston et al., supra note 12, at 115-19.23. See Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal

Choice of Legal Rules, 101 YALE L.J. 729, 731 (1992).24. See generally Jason Scott Johnston, Default Rules/Mandatory Principles: A Game Theo-

retic Analysis of Good Faith and the Contract Modification Problem, 3 S. CAL. INTERDISC. L.J.337 (1993).

25. Any survey of this literature begins with Richard Posner's seminal text on economic analy-sis of law, which covers far more than contracts. See generally RICHARD A. POSNER, ECONOMIC

ANALYSIS OF LAW (6th ed. 2003). Posner's law and economics approach is also evident in hisinfluential judicial decisions, the hallmark of which is "only one primary concern-efficiencythrough freedom of contract." Lawrence A. Cunningham, Cardozo and Posner: A Study in Con-tracts, 36 WM. & MARY L. REV. 1379, 1381 (1995). Judge Posner himself surveys the economicliterature on contracts and contract law in a recent article. Richard A. Posner, The Law andEconomics of Contract Interpretation, at 1 nn.2-3 (Nov. 2004), available at http://ssrn.com/abstract=610983. In this Article, I refer to the work of some of the most distinguished law andeconomics scholars writing today, such as Alan Schwartz, Robert Scott, Avery Wiener Katz, EricA. Posner, and Richard Craswell.

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ment of the parties to some other resolution). Another form of analy-sis attempts to predict the outcome of strategic behavior or bargainingthrough game theory models. I believe both are instructive as to spe-cific aspects of the dealmaking process, but neither is sufficient to ex-plain fully how people deal (or should deal) with contingency incomplex transactions because their conditions are rarely met in thereal world.

i. The Coase theorem

Ronald Coase, the 1991 Nobel Prize winner in economics, createdthe law and economics model by restating the way in which legal rulesshould address externalities, that is, costs not borne by an economicactor.26 If a manufacturer of widgets pollutes, for example, and doesnot bear the cost of clean-up, and the pollution imposes a cost onothers, then the manufacturer may make too many widgets, all otherthings being equal. He may produce widgets whose total societal costexceeds their value, and that result is inefficient.2 7 As to contracts, theCoase theorem says that as long as the parties involved can readilymake and enforce contracts in their mutual interest, neither direct reg-ulation nor tax impositions (to internalize the cost) are necessary toachieve an efficient outcome. 28 The conditions of his theorem are asfollows: (1) There are no transaction costs (i.e., any agreement thatcan be made will be made, and can be enforced without cost); and (2)there is a clear and understood set of rules defining, in the absence ofthe agreement, who will bear those costs that might otherwise be ex-ternalities.29 If those conditions are met, then it does not matter howthe default rules actually allocate the liabilities. The parties will usethe private ordering of a contract to determine who bears the cost,and the outcome will be efficient. 30

Economic analysis of law goes a step further and addresses the rulesthe law should impose in the absence of a contrary private allocationby contract. In the absence of a clear indication of the parties' inten-tion (which economic analysis would generally presume to militate to-ward an efficient result), economic analysis advocates would have theliability fall on the party best able to avoid, insure against, or bear thecost.31 Thus, in the absence of an explicit risk of loss term, a seller

26. David D. Friedman, The Swedes Got It Right, at http://www.daviddfriedman.com/Aca-demic/Coase_World.html (last visited Mar. 31, 2005).

27. Id.28. Id.29. Id.30. Id.31. Id.

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who had transferred title but retained the goods in its warehousewould bear the risk of a fire loss on the assumption that the sellercould prevent or insure against the fire at a lower cost than thebuyer.32

Are the transaction cost conditions of the Coase theorem met in acomplex deal negotiation? From one practitioner's intuitive stand-point, the answer is both "yes" and "no." As to the negotiation ofspecific provisions, yes, the theorem has some explanatory power.Default rules do address specific externality issues that arise withinthe broader negotiation of the transfer or creation of a business. 33 In-deed, accepting or contracting around the way those rules allocate riskand liability is a major part of deal negotiating and lawyering. Effi-ciency maximization, social welfare, or some other desirable functionought to play a role setting forth default obligations to third parties asbetween buyers and sellers of businesses, and economic analysis playsan important part in assessing whether the rules work.34 It is perfectlyreasonable that default rules in these areas would be based, in theabsence of other agreements between the parties, on an allocation ofliability to the parties best able to avoid, bear, or insure against thesocially unacceptable consequence. 35 Finally, in comparison to the to-

32. POSNER, supra note 25, at 96-97.33. Just a few examples are environmental and product liability successor liability rules, state

laws defining what constitutes a continuing business for the purpose of unemployment and othersocial benefits, post-employment benefit plan obligations under the Consolidated OmnibusBudget Reconciliation Act (COBRA), 29 U.S.C. § 1162 (2000), and workers' compensationstatutes.

34. See Cass R. Sunstein, On Philosophy and Economics, 19 QuINNIPIAc L. REV. 333, 334(2000). Sunstein argues for a reconciliation of economists and philosophers, focusing on theability of economic analysis to assess the efficacy of the positive or prescriptive aspects of law.Id. He defines the "prescriptive" work of economics as something less than full-fledged norma-tive assessment of what the law should be. "Economists are.., helpful in giving accounts of howlaw comes into being and in showing the best way to achieve specified ends. At the more norma-tive level, they are most helpful in showing that if some X is the goal, some instrument Y will orwill not achieve it." Id.

35. My experience is that good deal lawyers frequently and consciously use the ability to avoidor insure against risk as a negotiation tactic. For example, buyers of businesses have distinctlydifferent attitudes toward the allocation of risk as between onsite and offsite environmentalliability. Usually, large corporations have first-rate environmental departments and are capableof doing Phase I and Phase II environmental studies on a defined piece of property. It is notunusual for the result of a negotiation to be that the seller will retain liability for known onsiteproblems, and the buyer will assume the risk (fully or partially) for unknown problems. This isbecause due diligence bounds the reasonable risk. On the other hand, offsite liability is deter-mined under the federal superfund laws. Comprehensive Environmental Response, Compensa-tion, and Liability Act, 42 U.S.C. §§ 9601-9675 (2000). That means that the owner of a piece ofproperty can be responsible for contributing to the clean-up of a dump site, often miles from thepurchased property, as to which there may be no onsite records or boundaries within which toconduct due diligence. Most buyer's counsel will draw a line in the sand against the assumptionof this liability. The statement in the negotiation usually goes something like: "[W]e have no

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tal cost of a typical transaction (hundreds of thousands or millions ofdollars in legal, accounting, economist, and other fees), negotiatingany particular element of the agreement has a minimal marginal cost.

As to the deal as a whole, the answer would appear to be "no."Among the various transaction costs detailed in the literature arebounded rationality, 36 asset specificity, 37 information impactedness,38

asymmetrical information distribution,39 moral hazard,40 opportu-nism, 41 and plasticity. 42 Suffice it to say that all of those costs are, to agreater or lesser degree, present in any acquisition or venture capital

way of knowing where you or your predecessors took your waste offsite, you have or should

have had the better opportunity to avoid this cost, and you should bear the risk, no matter upon

whom the law puts the statutory liability." Similar arguments can be, and are, made with respect

to severance liability, workers' compensation, COBRA benefits, and other costs. For further

examples in the context of specific representations and warranties, see FREUND, supra note 12, at

234-80.

36. "Bounded rationality refers to human behavior that is 'intendedly rational, but only limit-

edly so'...." OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTI-

TRUST IMPLICATIONS 21 (1975) (quoting HERBERT A. SIMON, ADMINISTRATIVE BEHAVIOR, at

xxiv (2d ed. 1961)). "Simon observes in this connection that 'it is only because individual human

beings are limited in knowledge, foresight, skill, and time that organizations are useful instru-

ments for the achievement of human purpose."' Id. (quoting HERBERT A. SIMON, MODELS OF

MAN 199 (1957)).

37. This refers to whether assets are specialized to a particular use or transaction. Categories

of asset specificity are: site specificity (e.g., manufacturing assets located in close proximity to

reduce inventories), physical asset specificity (e.g., specialized tools and dies), and human asset

specificity (e.g., know-how). See Oliver E. Williamson, The Economics of Organization: The

Transaction Cost Approach, 87 AM. J. Soc. 548, 555 (1981).

38. This "is a derivative condition that arises mainly because of uncertainty and opportunism,

though bounded rationality is involved as well. It exists when true underlying circumstances

relevant to the transaction, or related set of transactions, are known to one or more parties but

cannot be costlessly discerned by or displayed for others." WILLIAMSON, supra note 36, at 31.

39. Parties to a transaction have uneven access to relevant information.

40. In economic terminology, moral hazard does not have moralistic overtones. It refers to

the lack of observability of contingencies and the consequence of hidden, unverifiable action

within contractual relationships. Armen A. Alchian & Susan Woodward, The Firm Is Dead;

Long Live the Firm: A Review of Oliver E. Williamson's The Economic Institutions of Capital-ism, 26 J. ECON. LIT. 65, 68 (1988).

41. Alchian & Woodward note:

Opportunism follows from bounded rationality plus self-interest. When a conflict

arises between what people want and what they have agreed to do for others, they willact in their own interest insofar as it is costly for others to know their behavior ....

Opportunism... includes honest disagreements. Even when both parties recognize the

genuine goodwill of the other, different but honest perceptions can lead to disputes thatare costly to resolve.

Id. at 66.

42. "We call resources or investment[s] 'plastic' to indicate that there is a wide range of discre-tionary, legitimate decisions within which the user may choose." Id. at 69.

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transaction. 43 Accordingly, the explanatory or normative power ofthe theorem at that level of complexity must be limited.

ii. Incompleteness and complexity

A sampling of more recent economic analysis scholarship bearingmost closely on contingent and complex business transactions demon-strates its limitations. The primary focus of the work has been the roleof the courts in supplying necessary terms of the contract that the par-ties, for whatever reason, have omitted.

In 1992, Professors Ian Ayres and Robert Gertner demonstratedthe inordinate complexity of attempting to posit particular defaultrules (those a court would supply in the absence of specification bythe parties) in a way that would predictably maximize economic socialwelfare. 44 They distinguished legal and economic forms of incom-pleteness. From the standpoint of legal scholars, a contract to sellgoods is "obligationally incomplete" if, in all future states of theworld, a term of the obligation is missing.45 So, for example, if thecontract is for the sale of widgets and neglects to specify the place ofdelivery, it is obligationally incomplete. 46 Economists look at incom-pleteness differently. The contract may be obligationally completebut fail to realize the potential gains from trade in all future states ofthe world: "These contracts are considered 'contingently' incompleteor 'insufficiently state contingent.' ",47 If the contract is obligationallycomplete (i.e., it is legally enforceable), a party may have incentives,depending on the state of the world, either to renegotiate the contractor to breach it.48

43. In these terms, there is: (1) bounded rationality because neither founders nor venture capi-talists are fully able to predict whether a start-up technology will succeed; (2) asset specificitybecause what tends to be unique about the venture is the skill of the founder; (3) informationimpactedness because persuading investors of the value of the business is not costless; (4) asym-metric information because the founder knows more about the technology (generally) than theinvestors; (5) moral hazard because of the limited ability even of a board of directors to observethe founder's day-to-day operation of the company; (6) potential for opportunism as the partiesperceive the original idea to be more or less valuable than originally thought; and (7) plasticitybecause of the wide range of decisions available to the business.

44. Ayres & Gertner, supra note 23, at 729.45. Id. at 730.46. Id.47. Id.48. Id. For example, see the facts in Big Horn Coal Co. v. Commonwealth Edison Co., 852

F.2d 1259 (10th Cir. 1988). There, an electric utility and a coal mine executed a long-term con-tract for the supply of millions of tons of low-sulfur coal. Id. at 1261. The contract, made in thewake of the Arab oil embargo of the early 1970s and the passage of the Clean Air Act, wasexceedingly complex, with a multi-variable price escalation clause, detailed specifications for thecoal (BTU content, ash content, etc.), and a force majeure provision that called for differentremedies on the happenstance of different causes of a failure of delivery. Id. at 1261-64. In the

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Ayres and Gertner pointed out the difficulties in attempting to max-imize social welfare through the imposition of contract default rules tomake contracts more contingently complete. Their model is based onthe default rule established in Hadley v. Baxendale:49 A carrier is onlyliable to a shipper for the foreseeable consequential damages of adelayed shipment.50 They concluded that, when contracting around adefault is costly (for example, offering alternative contracts with rangeof guarantees against delay), a default rule can potentially induce inef-ficiencies such as:

" Precaution: For shippers who would assign a low value to theshipment, a liberal consequential damages default rule wouldcause the carrier to spend too much to avoid delay; for shipperswho assign a high value, a default rule of foreseeability wouldinduce the carrier to spend too little.

" Failure to deal with low-end shippers: If the default rule is set atliberal consequential damages and there is a substantial differ-ence between high-value shippers and low-value shippers, carri-ers may simply set a price so high that only high-value shipperswill use the carrier.

" Transaction Costs: For shippers who would assign a low value tothe shipment, a liberal consequential damage default would causethe carrier to spend to contract around the default rule.51

ensuing ten years after the execution of the contract, two things significantly changed the state of

the world: (1) The spot price of equivalent low-sulfur coal dropped to about eight dollars per

ton, compared to the then applicable contract price (after escalation) of about fifteen dollars;

and (2) the utility made a subsequent decision to license and build nuclear facilities. Although

the lawsuit was the utility's attempt to have a court declare that the contract permitted it to

reduce its obligation to purchase coal, it is clear that it was nevertheless willing to bear the cost

of a breach, or a negotiated settlement against that breach, rather than comply fully with the

contract. In North Indiana Public Service Co. v. Carbon County Co., 799 F.2d 265 (7th Cir.

1986), a utility in similar circumstances simply walked away from its long-term contract, resulting

in the closure of a mine whose sole customer was that utility. See also City of Austin v. Decker

Coal Co., 701 F.2d 420 (5th Cir. 1983). These cases may be as close to laboratory examples as

occur in the real world. Before taking account of escalation or time-value, at roughly fifteen

dollars per ton at 8,000,000 tons a year for thirty years, the contracts had an absolute value of

between three and four billion dollars, rendering litigation almost costless in comparison. Nev-

ertheless, after stripping away the complexity of the price, delivery, and quantity obligations, the

courts invoked the basic economic risk allocation issues studied in a first-year contract law

course.

49. 156 Eng. Rep. 145 (1854).

50. Id. at 151.

51. Ayres & Gertner, supra note 23, at 751. The authors also conclude that there can be social

welfare inefficiencies even if there is no cost to contracting around a default, particularly if there

is asymmetry of information (e.g., the shipper knows how much it values prompt delivery and

the carrier does not) and carrier market power. Revealing the information might prompt the

carrier to take greater precautions, to contract around the default, or to charge a higher price,

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Combined with default rules for contingently incomplete contracts,changes in other variables such as asymmetry of information and thevalue assigned to the contract can exacerbate social welfare inefficien-cies.52 Moreover, as Ayres and Gertner acknowledged, even this sim-ple hypothetical level reveals legal and economic complexity (i.e., thenumber of state contingencies); "[t]he strategic inefficiencies ofdouble-sided, asymmetric information are all the more pathological intheir complexity and have only begun to be analyzed. '' 53

Professor Robert Scott's 2003 article studying contract indefinite-ness uses empirical data to cast doubt on the regulatory power of pri-vate contractual law in complex transactions. Professor Scottconcludes that complex transactions will not, as often as they will, de-pend on, or be significantly affected by, contractual default rules.54

He observes that first, many agreements "appear to be 'deliberately'incomplete, in the sense that parties decline to condition performanceon available, verifiable measures that could be specified in the con-tract at relatively low cost."' 55 Second, he observes that this incom-pleteness is more than a mere open term (like the transfer of risk ofloss) in an otherwise complete and enforceable agreement; indeed, theagreement is judicially unenforceable.5 6 He reaches the conclusionthat, in fact, the better explanation is that the parties, even in transac-tions among relative strangers, regard those aspects of the agreementas self-enforcing:

Recent work in experimental economics suggests . . . that the do-main of self-enforcing contracts may be considerably larger than hasbeen conventionally understood. A robust result of these experi-ments is that a significant fraction of individuals behave as if reci-procity were an important motivation (even in isolated interactionswith strangers), while a comparable fraction react as if motivatedentirely by self-interest. The evidence that in any populationroughly half behave fairly and half behave selfishly provides thefoundation for a theory of fairness grounded in the human motiva-

whether or not the carrier is able to discriminate between high- and low-value shippers withalternative contracts. Id. at 762-63.

52. Id. at 733 (stating that "[in short, the introduction of even slight transaction costs willmake the determination of efficient legal rules dramatically more difficult. We demonstrate thatthe behavior of contracting parties can change significantly in response to extremely smallchanges in other, more subtle underlying variables .... ").

53. Id. at 765. One assumes that building an economic model of default rules around thetypical sophisticated Merger and Acquisition (M&A) agreement would be on a scale with map-ping the human genome.

54. See generally Robert E. Scott, A Theory of Self-Enforcing Indefinite Agreements, 103COLUM. L. REV. 1641 (2003).

55. Id. at 1642.56. Id. at 1642-43.

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tion to reciprocate. Reciprocity requires no enforcement costs andalso permits parties to contract over nonverifiable measures of per-formance. Thus, this theory predicts that self-enforcement of delib-erately incomplete agreements between strangers is more efficientthan the alternative of more complete, legally enforceablecontracts.

57

Scott does not pretend to explain the source of the behavior of fair-ness,58 but poses a number of interesting explanations for why sophis-ticated parties might leave a contract incomplete.5 9 For purposes ofthis Article, I will focus only on one type, for which his hypotheses aresupported by my casual empiricism: The use of legally unenforceable"comfort agreements. ' 60 Scott speculates that the reasons may in-clude the parties' desire to learn something about each other's compe-tence, market conditions, or the taste for reciprocal fairness.6' Myexperience suggests all of the above, and I suggest another-the par-ties simply do not value judicial enforcement, even if they could haveit. 6 2

Finally, an entire paragraph near the end of Scott's article bearsrepeating in its entirety, not only for its remarkable perspicacity as tothe real world, but also because of its prescience to the discussion ofphilosophy for working lawyers that follows:

Notwithstanding the power of reciprocal fairness, contractualbreakdowns nonetheless occur, in part because as the experimentalevidence suggests there is both self-interest and reciprocity in theworld. But given such a world, the puzzle of indefinite contracts may

57. Id. at 1644-45 (footnotes omitted). I contend that this is an issue fair people regularly face

in dealing with unfair people. For a thoughtful treatment of the issue in negotiations, see

Jonathan R. Cohen, When People Are the Means: Negotiating with Respect, 14 GEO. J. LEGALEmnics 739 (2001).

58. Scott, supra note 54, at 1675 (stating that "[w]hatever the source of that behavior (whether

learned, normative, or intrinsic), it is quite relevant to understanding the contracting choices of

real world individuals in developed market economies who write intentionally incompletecontracts").

59. Id. at 1675-85.60. Id. at 1682-83.61. Id.

62. There are many complex agreements that are really little more than glorified comfort

agreements, for which parties expend huge amounts of money. The phrase in the practicing

world for such a deal is "sign-and-close," meaning that there will not be the usual delay between

the execution of a definitive agreement and the closing. At the time I am writing this, for exam-

ple, we are working on a "sign-and-close" deal. By the time we close, the parties, without any

enforceable contract, will have together spent hundreds of thousands of dollars in legal, account-

ing, Hart-Scott-Rodino (HSR) filing fees, due diligence, and other costs. Indeed, one of the

reasons why a delayed closing after a definite agreement, the HSR filing, can be avoided is

because the HSR Premerger Notification Rules permit a filing on a nonbinding letter of intent

and an affidavit stating that the parties have "good faith" intent to complete the transaction. 16

C.F.R. § 803.5(a)(2) (2004).

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now be solved. Contracting parties simply may have learned to be-have under two sets of rules: an explicit (rigid) set of rules for legalenforcement and an implicit (flexible) set of rules for self-enforce-ment. It may be that the lesson for courts is that any effort tojudicialize preferences for fairness will destroy the very informalitythat makes reciprocity so effective in the first instance. The experi-mental evidence suggests that the contemporary academic instinctto have courts fill gaps in incomplete contracts with broadly applica-ble standards of reasonableness and fair treatment may actually un-dermine the very norms of fairness that the legal system seeks toadvance. If so, it is important that neither courts nor academic com-mentators generalize about the impotency of reciprocal fairnessfrom the litigated cases, as these disputes only arise when the im-plicit incentives have broken down. Litigated cases, therefore, giveno clue of the power of reciprocal fairness in the many situationswhere these social preferences may have been effective in enforcingindefinite agreements, even between strangers. Understood in thebroader context of a system that relies on both legal enforcementand self-enforcement, the wisdom of the common law approach be-comes clearer.63

As Scott recognizes, dealmakers live with contingency, but they do notnecessarily invoke the law to control it.64

Professor Manuel Utset's recent article uses economic analysis toassess how the law might address contingency in entrepreneur-venturecapitalist relationships. 65 He makes the following observations: (1)There is a significant divergence between the expectations of entre-preneurs on one hand, and venture capitalists on the other; (2) the

63. Scott, supra note 54, at 1691-92 (emphasis added) (footnotes omitted). Cf. Lipshaw,supra note 3, at 35 (footnotes omitted):

In the transactional world, more often than might be thought in the academic world,parties take advantage of legal principles, yet often do not take full advantage of legalrights, and their behavior is not fully a matter of risk-benefit analysis or the predictionof outcomes under well-understood legal principles. Our sense of the Golden Rule (asubset of Kant's categorical imperative) not only provides a moral basis for avoidingfalse promises, but keeps us, in many cases, from requiring full victory, even when wehave a basis for it.

Id.64. For other interesting treatments of incompleteness, see Johnston, supra note 24 (discuss-

ing the impact of a good faith requirement on contract modification); George G. Triantis, TheEfficiency of Vague Contract Terms: A Response to The Schwartz-Scott Theory of U.C.C. Article2, 62 LA. L. REv. 1065 (2002) (suggesting that there are economically efficient reasons whycommercial parties may rationally prefer vague contract terms); Manuel A. Utset, A Theory ofSelf-Control Problems and Incomplete Contracting: The Case of Shareholder Contracts, 2003UTAH L. REV. 1329 (arguing that contractual incompleteness in the majority-minority share-holder context is attributable to the problem of self-control, namely procrastination); see alsoDOUGLAS G. BAIRD ET AL., GAME THEORY AND THE LAW 109-21 (1994) (applying insights ofgame theory to renegotiation of incomplete contracts).

65. See generally Manuel A. Utset, Reciprocal Fairness, Strategic Behavior & Venture Survival:A Theory of Venture Capital-Financed Firms, 2002 Wis. L. REV. 45.


original venture capital contracts are incomplete (largely in the sensedescribed in Part II); (3) the contracts generally grant most of the le-gal leverage to the venture capitalists; but (4) the nature of the entre-preneur's very human and very intangible contribution to the ventureprovides extra-contractual leverage that evens the game. 66 However,the extra-legal remedy available to the entrepreneur is strategic gam-ing, which Utset contends leads to inefficient allocation of economicresources. 67 His proposed solution-the legal imposition of a disclo-sure requirement from the venture capitalist to the entrepreneur-is,as he acknowledges, not nearly as robust as his analysis of the prob-lem.68 Indeed, the underlying assumption of the entrepreneur as ra-tional actor whose decisionmaking might be affected by betterdisclosure from the venture capitalist and the complexity of the situa-tion to be modeled calls into question the efficacy of the normativerecommendations.

69

Another branch of the study illuminating the role of contracts indealing with contingency is complexity. In a widely cited article,Professors Karen Eggleston, Eric Posner, and Richard Zeckhauser de-fine complexity along three dimensions: (1) The expected number ofpayoff contingencies specified; (2) the variance in the magnitude ofthe payoffs expected to flow between the parties; and (3) the cognitiveload required to understand the contract. 70 They further distinguish

66. See id.67. Id. at 53, 128-46.68. Id. at 146-47.69. There appears to be something of an infinite regress inherent in a solution that is merely

more information-particularly one that smacks of the typical disclaimers that go, for example,

into an SEC registration statement for an initial public offering. While the investment bankers

are selling, any securities lawyer worth her salt can draft disclosures and risk factors demonstrat-

ing that the business could never possibly succeed: "[Aiccordingly, there can be no assurance

that management's expectations will be realized." The analog would be the venture capitalist

schmoozing the entrepreneur while his lawyer gets a document with a risk factor that says: "ac-

cordingly, there can be no assurance that future conditions will not cause venture capitalist to

enforce its management rights, and terminate the present officers."

Moreover, founding entrepreneurs are variously described as "over-optimistic," id. at 100-03,

"over-confiden[t]" (indeed to the point of "blind[ness] ... to the need for more information"),

id. at 103-04, better at innovating than running a company, having "poor management skills,"

lacking "business savvy," Utset, supra note 65, at 92-93, and having "bounded rationality" (they

cannot predict the future very well), id. at 114 n.228. In sum, the starry-eyed, cocky, sheltered

engineer or scientist lacking people skills and a crystal ball is probably already overwhelmed

with information. The regress is in trying to find that conclusive piece of information or disclo-

sure that gets through to this kind of personality.70. See generally Eggleston et al., supra note 12. The examples the authors use are contracts

for architectural services, legal services, health care, software, debt, and movie stars. Id. at

94-96. These contracts are "complex" or "simple" depending on whether they combine or sub-

stitute for fixed fees with variable fees based on time, results, or specific services intended to

capture relatively complex contingent results. Id. I accept the examples of complex contracts

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functionally complete contracts from functionally incomplete con-tracts. When a contract is functionally complete, "it performs as wellas it can subject to constraints on the participants' abilities to distin-guish states and the court's ability to verify which state occurred. ' 71

Finally, they create a four-quadrant matrix to classify those contractsthat are simple or complex on one axis, and those that are functionallycomplete or incomplete on the other.72 Noting that economists wouldpredict highly complex contracts, but observing empirically that con-tracts are simpler than the degree of uncertainty, asymmetry of infor-mation, and political and regulatory environments suggest they wouldbe, the authors attempt to explain the discrepancy. They propose sev-eral explanations, including lack of environmental complexity, negoti-ation costs, asymmetric information, monitoring dynamics,evolutionary pressures and forms, convention, trust and reputation,judicial enforcement costs, and bounded rationality and renegoti-ation.73 In short, the costs and benefits of creating complex agree-ments, when weighed against each other, militate toward simpleagreements.

74

The limits of this attempt to apply science to the complexity of statecontingent agreements are apparent from the normative prescriptions.The primary thrust of this analysis is to recommend a complex schemefor the hindsight review of contracts in dispute, under which a courtwould attempt to divine the reasons for simplicity or complexity, andthen interpret the contract strictly or liberally in accordance with theformula.75 As for working lawyers, the proponents are honest enoughto recognize what, charitably, might be viewed as the early stage oftheir analysis.76

because as I understand it, the argument is a fortiori if applied to the complex agreements I havedescribed above.

71. Id. at 100-02. They observe that most real world contracts are not "perfectly complete."Id. at 100.

72. Id. at 102-03.73. Eggleston et al., supra note 12, at 104-06.

74. Id. at 107-26.75. One can only imagine what this would look like in real world litigation over a billion

dollar deal that did not work out.76. "One normative implication of our analysis is directed to lawyers, and this is simply that

more detail is not always good .... Complex contracts may be unnecessary when courts aresophisticated and futile when they are dull. Further research should focus on how lawyers oughtto evaluate complexity when drafting contracts." Eggleston et al., supra note 12, at 126. Even intheir passing reference to the implication of the approach for working lawyers, I believe they errempirically by presuming that lawyers draft contracts (even those purporting to be legally bind-ing) with a view solely to their interpretation by disinterested third parties. See generally Scott,supra note 54. As discussed below, I believe they err even more fundamentally if they presume

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The fact is that contracts, and hence contract theory, are limited intheir ability to address contingency: "All contracts are incomplete.There are infinite states of the world and the capacities of contractingparties to condition their future performance on each possible stateare finite. ' 77 When the empirical evidence suggests parties are as in-fluenced by self-enforcing norms as they are by contract, even in rela-tively simple transactions, there is a clear need to step beyond thecontract to understand how and why the deal gets done.

b. Strategy

Suppose that Jones Corporation wants to sell its Widget Division. Itdoes a discounted cash flow valuation of the business and determinesthat, based on its assessment of cash flows and a moderately conserva-tive discount rate, the business is worth $500 million. Its floor, how-ever, is $400 million because it needs that much cash to pursue analternative investment, and because its CEO believes that selling thedivision for any less would appear to be a bad deal to the stock ana-lysts, disproportionately impacting the value of Jones' stock.

Smith Corporation is interested in buying the Widget Division.Having reviewed the offering circular financials (but without any duediligence), Smith concludes the cash flow stream, by itself, is onlyworth $450 million, but it will be able to provide cost synergies thatincrease the value to $550 million. The task will be getting a deal ne-gotiated, not only as to price, but also as to allocation of risk. Jones

that the approach for working lawyers in complex business transactions may be derived solely

from a purportedly scientific model of law or economics.

Alan Schwartz and Robert Scott take a different approach to the issue of complex business

contingency, although still from an ex post interpretative standpoint. They use economic analysis

to demonstrate that sophisticated business firms, dealing with each other, would prefer fewer

default rules based on the court's idea of fairness and more deference to the parties' choice of

risk-benefit allocation. Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of

Contract Law, 113 YALE L.J. 541, 608-09 (2003). They conclude, moreover, that businesses

would prefer, on average, that courts attempt to divine the parties' intent, even if it were not

possible in every instance. Id. at 593-94. Finally, default rules can cause inefficiencies if the

parties engage in strategic behavior based on them (possible if the parties are heterogeneous,

drafting costs are finite, rules are complex, the standards are exploited to redistribute surplus,

and information is asymmetric). Id. at 619.Avery Katz's recent work has the merit of recognizing how little impact there may be in ad-

dressing issues of contract interpretation rules to judges, legislators, and other law professors,

but suffers from failing to address the possibility that even private lawmakers are not writing

contracts with a view to interpretation by third parties. Often, they are writing contracts, or not

writing them, or leaving them ambiguous (particularly where leaving an issue ambiguous leaves

one in a better position than having it clarified), or ducking issues entirely, just to get the deal

done. See Avery W. Katz, The Economics of Form and Substance in Contract Interpretation, 104

COLUM. L. REV. 496 (2004).

77. Scott, supra note 54, at 1641.

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suspects but does not know the amount of Smith's synergy expecta-tions, and Smith does not know that Jones' cash flow projections de-pend on the renewal, two years out, of several key contracts at priceincreases, something that is going to be difficult to achieve. Smith sus-pects that there is a floor amount Jones would accept but does notknow what it is.

This is a strategic game with asymmetric information. The payoffsto each party range between $400 million and $550 million. Each iscapable of "bungling." Smith could pay $550 million for a businessJones thought was only worth $500 million, and was willing to con-sider selling for as low as $400 million. Jones could sell a businessSmith thought was worth $550 million for as little as $400 million.78

Without attempting to solve this under game theory, I simply note themany possible slips 'twixt the theoretical cup and the real world lip.In order to predict an optimum solution, game theory holds that bothparties believe the other would not select a dominated strategy (i.e.,one that leads to a lesser payoff under any alternative action of theother). 79 In addition, when both parties are incompletely informed,the theory requires some anticipation of how a party will change itsbeliefs based on the other's actions, and then select its own actionconsistent with that belief.80 For example, if Smith opens the biddingtoo high, Jones may assume that Smith thinks the business is worthmore than its original valuations.81

Economic studies of strategic behavior are insightful but of rela-tively limited use to the dealmaker. The work points out conditionsunder which rational parties ought to make a deal, and at what out-come, but acknowledges the role of expectations and psychology inthe process. In short, economic analysis can bring the parties to water,but it may not make them drink. This is because the empirical evi-dence demonstrates that human beings do not always behave as ra-tional actors. As Utset notes, "shortly after von Neumann andMorgenstern put together their expected utility model, psychologistsbegan to gather experimental data showing that individuals tend toviolate some of the expected utility axioms. '82 The studies show thatpeople resort to rules of thumb (heuristics) rather than algorithms,

78. BAIRD ET AL., supra note 64, at 79-89.79. Id. at 80.80. Id. at 81.81. Baird and colleagues demonstrate this with an example drawn from the negotiation be-

tween Kaspar Gutman (Sydney Greenstreet) and the Russian general Kemidov over the statuein The Maltese Falcon. Id. at 81-83.

82. Utset, supra note 65, at 68-69.

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and "satisfice" rather than use all information available to them. 83

Moreover, "[j]udgments are made against backgrounds that are attimes ambiguous, uncertain, and vague, and at others, constructed andarbitrary. Our beliefs and expectations, however constructed, shapeour preferences and thus shape our decisions." 84 Indeed, differentdisciplines-cognitive psychology, linguistics, sociology, economics-each take a different tack in analyzing the sources of our expecta-tions.85 Finally, game theorists warn about losing sight of gameswithin games: "Hence, before we can be sure that a simple game cap-tures the dynamics of a collective action problem or any other compli-cated interaction, we must understand the extent to which it can beisolated from the context in which it arises." 86

Economic models, even game theory, do a far better job of explain-ing the problem than helping the actors solve it. Economics can iden-tify the Jones-Smith transaction as a "bargaining situation"-theinterrelationship of conflict and the mutual interdependence of theparties-or a "bargaining context"-where two or more parties willnegotiate to see if they can produce a surplus-but it cannot predict oreven advise on how to accomplish the bargain. 87 In my experience,the game theory archetypes, such as the Ultimatum Game or the Sab-otage Game, 88 accurately model aspects of the transaction, but offerlittle toward the process of getting the deal done. Dealmakers try tomake deals, and doing so means confronting, often simultaneously,

83. Id. at 69.84. Id. at 70.85. "[Olne's 'structure of expectations' [is] the way individuals organize knowledge about the

world and use that knowledge to process new information, events, and experiences." Id. at 71.

This is remarkably close to a description of what philosophy might offer, yet it is noticeably

absent from most of the "scientific" literature. Our expectations are the "ought," and what we

experience is the "is."86. BAIRD ET AL., supra note 64, at 191.

87. Utset, supra note 65, at 72 n.84 (citing THOMAS C. SCHELLING, THE STRATEGY OF CON-

FLICT 86-87 (1960)); see also MARTIN J. OSBORNE & ARIEL RUBENSTEIN, BARGAINING AND

MARKETS (1990); Robert Cooter, The Cost of Coase, 11 J. LEGAL STUD. 1, 17 (1982); John F.

Nash, Jr., The Bargaining Problem, 18 ECONOMETRICA 155 (1960). Indeed, the surplus in the

Jones-Smith transaction is $150 million, and the deal would be efficient at any negotiated price

between $400 and $550 million dollars. Smith, the buyer, would value the business at any price

up to $550 million, and Jones would be willing to take any amount above $400 million. Hence, if

the business were sold at $500 million, Jones would realize $100 million of surplus (value in

excess of its cost), and Smith would realize $50 million (paying a price $50 million less than its

expected utility). This is referred to as Kaldor-Hicks efficiency. POSNER, supra note 25, at 13.

88. Utset, supra note 65, at 124-28. As to the Ultimatum Game, I am thinking of many deals

not made because a "take it or leave it" ultimatum is better than no deal, but it is still perceived

by the CEO or board as unfair, and hence, not done. Alternatively, consider the Sabotage

Game, where two competitors are negotiating a merger (assume it passes section 7 muster) and

one is perceived to be negotiating unfairly. The aggrieved party might withdraw from the nego-

tiation and start a price war.

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asymmetrical information, and otherwise irrational notions of fairness,fatigue, hidden agendas, opportunism, and unrealistic expectations.When everything is negotiated in the Smith and Jones deal, and at theeleventh hour, the two CEOs bicker over who will bear a $5 millionpension cost in a $500 million deal, and their respective egos refuse toallow any concession, nothing in the economic model tells thedealmaker how to bridge that gap.89

2. The Societal Approach

In 1963, Professor Stewart Macaulay published a seminal analysis ofthe social context of contracts in business relationships.90 Like thescholars in law and economics, Macaulay sought to challenge, againstempirical observations, traditional models of the impact of contractlaw in society. Under that model, with the decentralization of societyand the transformation of society from community to organization,the legal enforcement of promises is necessary to coerce us to honorobligations to each other. In this model, the institution of contractentails careful planning of relationships, with all contingencies spelledout, a body of clear rules to facilitate planning, and the use of litiga-tion (and the state's monopoly on force) to deter breach and resolvedisputes.91 As we saw in the economic analysis of law, Macaulaysought to explain the gap between this academic model and what heobserved in practice: Contract planning and law were at best marginalto most business relationships. Business people, by and large, did notcare about legal contracts or honor a legal approach, and dealt withcontingency by alternative mechanisms: "There are business culturesdefining the risks assumed in bargains, and what should be done whenthings go wrong."'92 Moreover, few contract disputes are litigated, and

89. Id. at 72 n.84 (stating that "'[tihe bargaining problem concerns how to get players in aconflict to reach an agreement that is in their mutual interest when it is in each player's individ-ual interest to hold out for as favorable a settlement as possible."') (quoting STEVEN J. BRAMS,

NEGOTIATION GAMES: APPLYING GAME THEORY TO BARGAINING AND ARBITRATION 29(1990)). Non-game theory economic analysis does not purport to prescribe for individual law-yers doing particular deals. As Richard Posner notes,

The basic assumption, that human behavior is rational, seems contradicted by the ex-periences and observations of everyday life. The contradiction is less acute when oneunderstands that the concept of rationality used by the economist is objective ratherthan subjective, so that it would not be a solecism to speak of a rational frog.

POSNER, supra note 25, at 17.90. See generally Macaulay, Non-Contractual Relations, supra note 5. Macaulay summarized

the body of his work twenty-two years later in a University of Wisconsin symposium on law,private governance, and continuing relationships. See generally Macaulay, Empirical View, supranote 5.

91. Macaulay, Empirical View, supra note 5, at 467.92. Id.

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when they are, they are generally not resolved by the litigation itself.93

Macaulay described the various social mechanisms other than contractlaw that are employed to address and resolve business transactioncontingency, particularly in view of the cost and uncertainty in thelegal system itself: Social networks cutting across bureaucratic organi-zations, reputational sanctions, acquiescence to relationships ofpower, exploitation, and dependence. 94

The law and economics movement had a goal similar to that of thelaw and society movement-to liberate contract law from its narrow,formal doctrinal constraints and to place it in the real world.95 Lawand economics posited a set of norms dictated by one (at least theo-retically measurable) utilitarian standard: The maximization of socialwelfare. 96 Ironically, Macaulay's 1985 criticism of the limits of Willis-tonian doctrine could just as easily apply to much of the work, almosttwenty years later, of law and economics:

The contract process in action seldom is a neutral application of ab-stract rationality. The party with the best argument as judged by acontracts professor will not necessarily win the case. An opponentwith a plausible argument, little need to settle, and resources to playthe lawyering game is unlikely to bow to arguments favored by lawprofessors at elite schools ....

In the face of many studies challenging its descriptive accuracy,many scholars and theorists continue to paint a simple instrumentalpicture. What purposes are being served by all this traditionalscholarly effort? Perhaps it is a form of denial. The formal contractsystem claims to be neutral and autonomous and to rest on simplerationality. A descriptively accurate model of the process chal-lenges these assumptions.97

In short, Macaulay is describing the sheer complexity of the world,one with all sorts of state contingencies. Moreover, it is a world socomplex that a theorist claiming to have found the single model fordealing with business contingency is either deluded by his faith in hiscreation or by his view of his relationship to a deity. So where do welook when we wish to channel our cross-disciplinary impulse, at leastinsofar as lawyers working ex ante in complex business transactionsare concerned? I believe that is a philosophical question, and so it isto philosophy I turn.

93. Id. at 468.94. Id. at 468-71.95. See POSNER, supra note 25, at 23-28.96. Id. at 25 (stating that "[t]he theory is that the common law is best (not perfectly) explained

as a system for maximizing the wealth of society").97. Macaulay, Empirical View, supra note 5, at 477-78.

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B. The Law's Approach to Contingency in Philosophical Context

The appropriate road to understanding how working lawyers, ascounselors and advisors, might deal with commercial contingency(apart from honing their drafting skills) follows a path already pavedby philosophy. Martha Nussbaum has described how law, from Lang-dell to Posner, has defended itself as an orderly and rational disciplinethrough an affiliation with science. 98 She observes,

Law students today very frequently learn at least some economics,since it is often claimed that this is the science (if science it is) mostrelevant to the understanding of the law. Far more rarely do theylearn to ask questions about this whole scientific assumption and tosearch for alternative understandings of rigor and system. Socrateswould have had some irritating questions to ask here, especially ifhe suspected that he was dealing with people whose confidence intheir expertise outran their ability to answer questions about it.99

Having spent a career outside the ivory tower seeking to resolvecontingencies on an ex ante basis, my empirical observation is that as-piring to have science fully explain how the creative process of gettingdeals done is, like a second marriage, the triumph of hope over experi-ence. Such a view does not appear to have great traction outside thelegal academy, and perhaps it is time to ask why.1°° The disciplines ofcontract theory and economics have much to offer the working law-yer;101 but for the remainder of this Article, I will undertake an in-quiry into how knowledge of philosophical approaches to utility,morality, and contingency might assist lawyers in the very practicalbusiness of complex mergers or bringing a fledgling enterprise intobeing.102

For much of human history, and, still today, people have believedthere is a relationship between virtue and reward. Religion often ex-plained why good people suffered or bad people prospered in this

98. Martha C. Nussbaum, The Use and Abuse of Philosophy in Legal Education, 45 STAN. L.REV. 1627, 1629 (1993).

99. Id. at 1629-30.100. See Katz, supra note 76, at 507.101. Although the one time I called my friend and classmate, Douglas Baird, for insights on

the application of game theory to a particular problem that I was facing, he simply laughed atme.

102. Nussbaum notes:Consider Langdell's assumption that if law is to be rational and systematic it must be

a deductive hierarchy of principles. Surely it would be relevant to look at that assump-tion in the light of debates about method and rationality both in the philosophy ofscience and in moral and political philosophy. It may be that no discipline really worksthe way Langdell thinks science works; or, it may be that science does work this waybut that law is in relevant respects unlike science. All these things need to be asked.

Nussbaum, supra note 98, at 1637 (footnote omitted).

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world: They would receive the appropriate reward or punishment inthe next. At the outset of the Enlightenment, the power of reason inexplaining the physical world-Newton, Copernicus, Galileo-influ-enced some philosophers (in particular, Leibniz) to conclude that thiswas the best of all possible worlds. 10 3 It would only be a matter oftime until we understood all contingency-the reasons why virtue didnot necessarily equate with reward.104 But that optimism diminishedin the face of the cruel reality of the world, and Rousseau's great con-tribution was to separate the notions of natural and moral evil:105 "Weare the authors of our own suffering and could be the source of ourown happiness-not because God is keeping score and meting out jus-tice, but because He has so arranged the world that such justice is partof a natural order."'1 6

But to understand contemporary skepticism as applied to law (ar-gued most passionately, if not most persuasively, by Judge Posner),and its rejection of idealism, and to prepare lawyers to argue with itspremises, one must understand that there is nothing new under thesun. The contemporary skeptics are not the first social philosophersto reject any notion of the metaphysical or the transcendental as ex-planation for how we deal with the world. The great thinkers of theEnlightenment pondered and debated the contingencies and uncer-tainties of the world-why things do not turn out as they should-andthat inquiry continues to the present day. 107 Immanuel Kant argued

103. Or as Alexander Pope's Essay on Man described it poetically:All Nature is but Art unknown to thee;All chance direction, which thou canst not see;All discord, harmony not understood;All partial evil, universal good:And spite of Pride, in erring Reason's spite,One truth is clear, Whatever is, is right.

Alexander Pope, Essay on Man, available at http://www.theotherpages.org/poems/pope-el.html(last visited Feb. 14, 2005).

104. NEIMAN, supra note 1, at 18-31.105. "Recall Rousseau's project. The idea of radically separating natural from moral evil, and

calling whatever is left over the human condition, was part of a search to show that events likeearthquakes were events without meaning." Id. at 235.

106. Id. at 47.107. As Susan Neiman observed,

The fact that the world contains neither justice nor meaning threatens our ability bothto act in the world and to understand it. The demand that the world be intelligible is ademand of practical and theoretical reason, the ground of thought that philosophy iscalled to provide. The question of whether this is an ethical or metaphysical problem isas unimportant as it is undecidable, for in some moments it's hard to view as a philo-sophical problem at all. Stated with the right degree of generality, it is but unhappydescription: this is our world. If that isn't even a question, no wonder philosophy hasbeen unable to give it an answer. Yet for most of its history, philosophy has beenmoved to try ....

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there was a permanent irresolvable contingency to the world-a per-manent divide between the way the world is and the way our reasontells us the world ought to be. Hegel refused to concede the gap: "Thesole aim of philosophical inquiry is to eliminate the contingent.' 10 8

Further, David Hume rejected any role at all for philosophy in ad-dressing the issue. Our modern debates about contingency are shapedby the philosophers' speculations. 10 9

Before we reject idealism based in philosophy as something to bevalued in a working deal lawyer, we owe ourselves at least the rigor ofunderstanding the history of that skepticism and its counterarguments.The contingency debate invokes both skeptical and idealistic episte-mologyl a° (how do we know what we know?) and skeptical and ideal-istic morals (how do we decide the right thing to do?). And a centralissue of contingency is whether our virtue relates to our well-being(utility, reward, happiness). Whether or not they recognize it, the newskeptics are heirs to a well-established history of skepticism that ispowerful for picking apart any basis for idealism but hardly proposes away to go about one's life, either as a matter of utility or morality."1 '

Id. at 7.

108. G.W.F. HEGEL, INTRODUCTION TO THE LECTURES ON THE PHILOSOPHY OF WORLD His-TORY 28 (H.B. Nisbet trans., 1975) (1857); see also NEIMAN, supra note 1, at 89.

109. This and what follows are the work of a lawyer delving into philosophy to make a pointfor lawyers and legal scholars, and is neither a professional summary of philosophical thoughtnor a history of philosophy.

110. Epistemology is the branch of knowledge concerned with how knowledge is derived.FLEW, supra note 4, at 109. Historically, on one pole are rationalists (Plato and Descartes) whocontend that we can only know what is true through our reason. Id. Empiricists at the otherpole (Locke and Hume) contend that we only know what is true from the experience of oursenses. Id.

Understanding the difference requires understanding something about the truth-value of pro-positions: (1) necessary propositions (those which cannot be negated); (2) contingent proposi-tions (those which may be true, but could otherwise have been false); (3) a priori propositions(those whose truth can be established through reason alone and without reference to experi-ence); (4) a posteriori propositions (those whose truth can only be established by experience);(5) analytic propositions (those whose truth may be established by definition); and (6) syntheticpropositions (all propositions that are not analytic). ROGER SCRUTON, MODERN PHILOSOPHY158-59 (1995). The statement, "a bachelor is unmarried," is analytic-it is true by definition.The proposition, "all bachelors are unhappy," is synthetic and contingent-it is not true merelyby reference to the concepts within it, and even if true, might otherwise be false. Id. at 159.

An empiricist would reject the notion that that there can be synthetic a priori truth. Thosetruths that are not true by definition may only be established as true by experience. Kant con-tended otherwise, and his Critique of Pure Reason set forth the argument why, and to whatextent, truth could be synthetic and a priori-i.e., derived purely by our reason, as opposed toour sensory experience. Id. at 159-62.

111. This is hardly new for skepticism. As Susan Neiman observes of the great skeptics PierreBayle and David Hume, "[b]oth were more interested in undermining everyone else's conclusionthan in establishing any of their own." NEIMAN, supra note 1, at 167.

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1. Precursors of the Present Philosophical Debate

a. The Skepticism of Hume

The natural religion of the Enlightenment was based on what isknown as the "argument from design." 112 It is an a priori argumentthat the order we see in the universe must be the product of someintelligent design-that is, God's creation of a universe containingphysical and moral laws, but in which God does not intervene on adaily basis.'l 3 David Hume's skepticism punctured the faith underly-ing that argument. a14 He rejected any role for reason in our under-standing of the world or the determination of our moral obligations.11 5

His was a powerful denunciation of idealism. He offered neither epis-temological explanation for contingency, nor a systematic ethic. Be-cause Hume found nothing beyond the world we experience, hebelieved that our activities can only be directed to utility.1 1 6 His

moral advice reduced in the end to a "mediocre" pragmatism. 17

Hume's goal was to approach the workings of the mind and eco-nomics as the science of the Enlightenment had approached the work-ings of the physical world:

But may we not hope, that philosophy, if cultivated with care, andencouraged by the attention of the public, may carry its researchesstill farther, and discover, at least in some degree, the secret springsand principles, by which the human mind is actuated in its opera-tions? Astronomers had long contented themselves with proving,from the phenomena, the true motions, order, and magnitude of theheavenly bodies: Till a philosopher [Newton], at last arose, whoseems, from the happiest reasoning, to have also determined thelaws and forces, by which the revolutions of the planets are gov-erned and directed. The like has been performed with regard toother parts of nature. And there is no reason to despair of equal

112. See SCRUTON, supra note 110, at 131-34.

113. A.N. WILSON, GOD'S FUNERAL 22 (1999).

114. See id. at 23-26. Martha Nussbaum has preceded me in drawing parallels between the

analytical styles of Richard Posner and David Hume. See Martha C. Nussbaum, "Only Grey

Matter"? Richard Posner's Cost-Benefit Analysis of Sex, 59 U. Cm. L. REv. 1689, 1705-07 (1992);see generally Martha C. Nussbaum, Still Worthy of Praise, 111 HARV. L. REV. 1776 (1998) [here-

inafter Nussbaum, Still Worthy].

115. NEIMAN, supra note 1, at 154-55, 167-68.116. Susan Neiman describes Hume's view: "[H]is very reasonable explication of the circum-

stances giving rise to the world's evils showed that human reason leads you wrong. If you follow

human reason, you expect the world to be one way. If you open your eyes, you see that it's

another." Id. at 167.117. "For those wishing to get about with a measure of safety ... which instrument [experi-

ence or reason] recommends itself? The customs and habits that guided generations of mediocre

but tolerable lives before you, or a compass that, fixed on an unknown object, always seems to

indicate the wrong direction?" Id. at 167-68.

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success in our enquiries concerning the mental powers and econ-omy, if prosecuted with equal capacity and caution.118

Or as he stated in the introduction to his Treatise of Human Nature:And tho' we must endeavour to render all our principles as univer-sal as possible, by tracing up our experiments to the utmost, andexplaining all effects from the simplest and fewest causes, 'tis stillcertain we cannot go beyond experience; and any hypothesis, thatpretends to discover the ultimate original qualities of human nature,ought at first to be rejected as presumptuous and chimerical.119

Hume's attack on the value of moral philosophy in addressing theissues of mind and economy is unparalleled in sheer eloquence:

But this obscurity in the profound and abstract philosophy, is ob-jected to, not only as painful and fatiguing, but as the inevitablesource of uncertainty and error. Here indeed lies the justest andmost plausible objection against a considerable part of metaphysics,that they are not properly a science; but arise either from the fruit-less efforts of human vanity, which would penetrate into subjectsutterly unaccessible to the understanding, or from the craft of popu-lar superstitions, which, being unable to defend themselves on fairground, raise these entangling brambles to cover and protect theirweakness. Chased from the open country, these robbers fly into theforest, and lie in wait to break in upon every unguarded avenue ofthe mind, and overwhelm it with religious fears and prejudices. 120

How then did Hume address the issue of contingency, either episte-mologically or morally? From an epistemological standpoint, Humeconcluded that reason-our ideas or our ideals-has no bearing on, orutility in, making sense of the world. Ideas are simply copies of oursense impressions.121 We can tell the difference between an idea andan experience because of its clarity: There is a difference between hav-ing the idea of my son and seeing my son. The latter is sharp anddistinct relative to the former. What we know from ideas has no im-plications for what we experience. What we presume to know in thephysical world is a presumption of cause and effect, not provable byreason, derived from the constant conjunction of certain causes andcertain effects. We have never seen a billiard ball fail to move whenstruck by another one, so we infer the first ball striking the secondcaused it to move. There is no reason in logic why the second ballmust move: We can imagine a world in which, having been struck, thesecond ball remains stationary or disappears in a puff of smoke.

118. DAVID HUME, AN ENQUIRY CONCERNING HUMAN UNDERSTANDING 8 (1993) (1777).119. DAVID HUME, A TREATISE ON HUMAN NATURE 44 (Ernest C. Mossner ed., 1985)

(1739).120. HUME, supra note 118, at 5-6.121. David Hume, An Abstract of a Book Lately Published, Entitled, A Treatise of Human

Nature, &C., excerpted in THE PHILOSOPHER'S HANDBOOK 441 (Stanley Rosen ed., 2000).

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So what is our basis for being able to predict that the sun will riseagain, or the car will start when I turn the key? Hume's answer is

psychological disposition-"custom" or "habit.' 22 Our reliance on

the continued consistency of experience is a kind of natural instinct.And do we have free will, or are we subject to determinacy? Hume

finds the distinction empty: Only experience, and not reason, ties ac-

tions to morality, just like the cause and effect of physical events.123

We experience the same repeated conjunctions of apparent cause and

effect, and expect the future will resemble the past. What we sense as

freedom is simply the absence of an external restraint. Our choicesare equally determined, but we assume, merely from the continuedobservation of the impact of choice and its outcome, what is moraland what is not.124

But to understand Hume's view of morality, we need to further ana-lyze the last two sentences. If reason finds morality in the linkage of

the exercise of virtue with material reward, then it is as specious asany other attempt to know anything other than by experience. In thisregard, he took on the optimistic general Providence of deism: Thatthe designs of nature prove the infinite goodness of its cause.125 Toprove that the world is not what our reason would expect it ought to

be if designed or operated by a good God, one need only observe themiseries, pains, and uncertainties of life. He concludes that

[tlhere may four hypotheses be framed concerning the first causesof the universe: that they are endowed with perfect goodness, thatthey have perfect malice, that they are opposite and have bothgoodness and malice, that they have neither goodness nor malice.Mixed phenomena [the fact we observe both good and evil] cannever prove the two former unmixed principles. And the uniform-ity and steadiness of general laws seem to oppose the third. Thefourth, therefore, seems by far the most probable.1 26

In the face of the randomness of good and evil as proved by experi-ence, why be moral? As one would expect, his view of morality isthat, like truth, it should be determined on the basis of experimental

122. Id. at 444.123. Id. at 450-51.124. Hume said,

And as there is often a constant conjunction of the actions of the will with their mo-

tives, so the inference from the one to the other is often as certain as any reasoning

concerning bodies: and there is always an inference proportioned to the constancy of

the conjunction. On this is founded our belief in witnesses, our credit in history, and

indeed all kinds of moral evidence, and almost the whole conduct of life.Id. at 451.

125. See generally DAVID HUME, DIALOGUES CONCERNING NATURAL RELIGION (Martin Bell

ed., 1990) (1779).126. Id. at 122.

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method, not reasoned speculation.12 7 Hume observes that moral judg-ments are regularly accompanied by a sense of approval or disap-proval that precedes the judgment.12 8 Hume concludes that the onlycommon element of our sense of approval or disapproval of particularactions is utility.' 2 9 Benevolence, justice, and government only occurand are generally acknowledged to be virtuous when they have utilityfor us. 130 None of this is the result of a priori knowledge, nor are thequalities restricted to those who happen to possess greater powers ofreason:

The social virtues must, therefore, be allowed to have a naturalbeauty and amiableness, which, at first, antecedent to all precept oreducation, recommends them to the esteem of uninstructed man-kind, and engages their affections. And as the public utility of thesevirtues is the chief circumstance, whence they derive their merit, itfollows, that the end, which they have a tendency to promote, mustbe some way agreeable to us, and take hold of some natural affec-tion. It must please, either from considerations of self-interest, orfrom more generous motives and regards. 13'

In the end, according to Hume, there is no ideal by which to setone's course in life, except to rely on our common sense and livepragmatically:

And, in general, no course of life has such safety (for happiness isnot to be dreamed of) as the temperate and moderate, which main-tains, as far as possible, a mediocrity, and a kind of insensibility, inevery thing.132

Hume's empirical emphasis on utility influenced his friend AdamSmith and the later utilitarians like Jeremy Bentham and John StuartMill. 133

b. The Limited Idealism of Kant

Kant sought to find a middle ground between the sharp skepticismof Hume and the pure idealism of Leibniz. In his Critique of PureReason, Kant argued that synthetic a priori knowledge-knowledge

127. DAVID HUME, AN ENQUIRY CONCERNING THE PRINCIPLES OF MORALS 9 (Eugene Free-man ed., 1966) (1777).

128. See id. at 65-67.129. "In general, what praise is implied in the simple epithet useful! What reproach in the

contrary!" Id. at 12.130. See id. at 8-45.131. Id. at 48-49.132. NEIMAN, supra note 1, at 166 (quoting DAVID HUME, DIALOGUES CONCERNING NATU-

RAL RELIGION 184 (J.C.A. Gaskin ed., 1993)).133. See generally JOHN STUART MILL, UTILITARIANISM (1861), excerpted in PHILOSOPHY:

BASIC READINGS 99-103 (Nigel Warburton ed., 1999); JACK RUSSELL WEINSTEIN, ON ADAMSMITH (2001); ADAM SMITH, THE THEORY OF MORAL SENTIMENTS (2000) (1854).

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accessible to us only through reason and not experience-was possi-ble.' 34 Indeed, his argument was that such a priori knowledge wasnecessary even for a skeptic like Hume to pose the question "how dowe know?"'135 But Kant reached a surprisingly nuanced conclusion:The only things we can judge to be true are those which, in the firstinstance, are the subjects of our experience (or possible experi-ence). 136 The way we perceive that experience is shaped by certainconcepts, which together constitute our understanding that we simplycould not have acquired from experience, such as unity, causation,substance, and plurality.137 In short, in the first part of the Critique ofPure Reason, Kant deduces that, subjectively, we are able to orderand explain our experience only with an already ingrained take on theworld. Moreover, he deduces that there is objective knowledge: Weobserve a world that can be other than it seems to us, and which existsindependently of our perspective on it.138 Kant rejects the pure ideal-istic notion that everything happens for a reason-that there is eithera specific or a general Providence knowable to us objectively.' 39 Butin the world of experience, there is an objective law of causality. Asto empirical events in time and space, everything that happens isbound by cause and effect. 140

Kant's application of his metaphysics to morality is important tounderstand in responding to the skeptical view and is the subject of hisCritique of Practical Reason.141 Kant's basic metaphysical distinctionis that in practical matters, reason is capable of letting us decide whatwe ought to do-it makes no claims as to truth or falsity. 142 As to theassessment of truth, reason that takes us beyond experience or possi-ble experience is "pure. ' 143 It seeks unconditioned knowledge of theworld-to view the world from a point of view other than that of theobserver.144 And pure reason, detached from experience or possibleexperience, can make no claims of truth about the objective world. 145

134. See generally IMMANUEL KANT, Selections from Critique of Pure Reason, in BASIC WRIT-

INGS OF KANT, supra note 13 at 1.135. See id. at 35-38.136. Id. at 3.137. Kant called these "categories." Id. at 57-59.138. Id. at 60-87.139. Id. at 19.140. KANT, supra note 13, at 82-83.141. See generally IMMANUEL KANT, Selections from Critique of Practical Reason 223, in BA-

SIC WRITINGS OF KANT, supra note 13.142. Id. at 225-26.143. KANT, supra note 134, at 6.

144. Id. at 13-14.145. See id.

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As to morality, Kant rejects the notion that we are merely slaves tothe cause and effect of the physical world, and the basis of this rejec-tion is the role of our reason in helping us determine what we ought todo. 146 We are physical beings subject to the natural world of causeand effect, of hunger and desire, of greed and fear, and at the sametime, we are free and autonomous moral agents with the power to willan end, whether or not it is in our self-interest. 147 As one writer de-scribes it:

Of all [intentional] actions the question can be asked: Why do that?This question asks not for a cause or explanation, but for a reason.Suppose someone asks me why I struck an old man in the street.The answer 'Because electrical impulses from my brain precipitatedmuscular contractions, and this resulted in my hand making contactwith his head' would be absurd and impertinent, however accurateas a causal explanation. The answer 'Because he annoyed me' maybe inadequate in that it gives no good reason, but it is certainly notabsurd. Reasons are designed to justify action, and not primarily toexplain it. They refer to the grounds of an action, the premises fromwhich an agent may conclude what to do.148

This is no mere historical point. There is, in relatively recent schol-arly literature on contract default rules, a debate that arises out ofconfusion over this very issue. Professor Charles Fried is an heir toKant when he characterizes contract as a subset of promise, and seesits moral basis in our power, by our will, to intervene in and changethe course of the world of cause and effect. 149 Fried uses practicalreason to access a moral law we should accept universally-we honorour promises: "The obligation to keep a promise is grounded not inarguments of utility but in respect for individual autonomy and intrust."150

In his oft-cited criticism of Fried's autonomy theory, Richard Cras-well argues that the moral basis for promising does not provide anycoherent basis for determining how to resolve incompleteness issueswith default rules.151 Without my expressing a view on whether Fried

146. KANT, supra note 13, at 203.147. "The positive concept of freedom furnishes this . . . cognition, which cannot, as with

physical causes, be the nature of the sensible world (in the concept of which we find conjoinedthe concept of something in relation as cause to something else as effect)." Id. at 204.

148. Roger Scruton, Kant, in GERMAN PHILOSOPHERS 1, 69-70 (Keith Thomas ed., 1997).149. CHARLES FRIED, CONTRACT AS PROMISE 7-8 (1981). For another view on why we con-

sider the law to bind us, see Rex J. Zedalis, On First Considering Whether Law Binds, 69 IND.

L.J. 137 (1993).150. FRIED, supra note 149, at 16.151. Richard Craswell, Contract Law, Default Rules, and the Philosophy of Promising, 88

MIcH. L. REV. 489, 517-24 (1989).

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or Craswell has the better of it on default rules, 52 there is little ques-tion that Fried has a better handle on the philosophical context-har-monizing both the moral and utilitarian aspects in Kantian fashion:

There is ... a version of rule-utilitarianism that makes a great dealof sense. In this version the utilitarian does not instruct us what ourindividual moral obligations are but rather instructs legislators whatthe best rules are. If legislation is our focus, then the contradictionsof rule-utilitarianism do not arise, since we are instructing thosewhose decisions can only take the form of issuing rules. From thatperspective there is obvious utility to rules establishing and enforc-ing promissory obligations. Since I am concerned now with thequestion of individual obligation, that is, moral obligation, this legis-lative perspective on the argument is not available to me. 153

The frustration with accepting Kant's enduring dualism between thetranscendental "ought" and the real world "is," captured in the ex-change between Fried and Craswell, is the basis for much of the phi-losophy that followed Kant. Some, expressed most thoroughly andvividly by Hegel, took the view that there was no dualism and hence,no contingency; there was an "ought" and the history of the world wasthe progress toward the unity of the "is" with the "ought.1154 Forothers, there was pragmatism.

2. Pragmatism

Pragmatism is a classification under which falls the thinking of anumber of influential American thinkers spanning the turn of thetwentieth century-William James, John Dewey, Charles Peirce, andJustice Holmes-as well as contemporary thinkers such as RichardRorty. It responds to the gap between the "is" and the "ought" byconcluding it is a problem beyond our ability to solve. Although it is

152. Indeed, the point of this Article is that the role of courts or legislatures in setting default

rules is of more concern in scholarly debates among law professors than it is in the world of deal

lawyers. Nevertheless, I have argued elsewhere that contracts qua contracts are not moral in-

struments. Jeffrey M. Lipshaw, Duty and Consequence: A Non-Conflating Theory of Promise

and Contract, available at http://ssrn.com/abstract=664611 (last visited Mar. 11, 2005).

153. FRIED, supra note 149, at 16. For what it is worth, Kant would have probably opted for

formalism over substance in the interpretation of contracts, consistent with his view that the

practical world should consist of positive law. See Jeremy Waldron, Kant's Legal Positivism, 109

HARV. L. REV. 1535, 1545 (1996). Waldron states:

The premise of Kant's account is that, in the absence of legal authority, we must expect

that individuals will disagree about right and justice and that this disagreement will lead

to violent conflict. The task of the legislator is to put an end to this conflict by replacing

individual judgments with the authoritative determinations of positive law.

Id. at 1545.154. The philosophy of Hegel is not directly relevant to my thesis, and I leave it for profes-

sional historians of philosophy. See NEIMAN, supra note 1, at 84-103; Peter Singer, Hegel, in

GERMAN PHILOSOPHERS, supra note 147, at 105.

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difficult to capture all of the variants of pragmatic thought in a fewsentences, common denominators are beliefs that: (1) Ideas do notnecessarily reflect the world as it is;155 (2) the truth-value of an idea(i.e., whether it accurately describes the world) is not necessarily re-lated to the utility of the idea;156 and (3) the dogmatic insistence onthe truth of any single idea, particularly in the face of experience, iswrong.157 As William James wrote:

A pragmatist turns his back resolutely and once for all upon a lot ofinveterate habits dear to professional philosophers. He turns awayfrom abstraction and insufficiency, from verbal solutions, from bada priori reasons, from fixed principles, closed systems, and pre-tended absolutes and origins. He turns toward concreteness and ad-equacy, towards facts, towards action and towards power. Thatmeans the empiricist temper regnant and the rationalist temper sin-cerely given up. It means the open air and possibilities of nature, asagainst dogma, artificiality, and the pretence of finality in truth. 158

Like philosophers before them, the pragmatic thinkers wrestledwith the issue of contingency. John Dewey described the world asfearful, awful, precarious, and perilous. 159 He further wrote, "Thestriving to make stability of meaning prevail over the instability ofevents is the main task of intelligent human effort." 160 But Deweysaw the resolution of contingencies not in philosophical speculation,but in the work of science:

[Tjhe things of ordinary experience contain within themselves amixture of the perilous and uncertain with the settled and uniform.The need for security compels men to fasten upon the regular inorder to minimize and to control the precarious and fluctuating. Inactual experience this is a practical enterprise, made possible byknowledge of the recurrent and stable, of facts and laws. Philoso-phies have too often tried to forego the actual work that is involvedin penetrating the true nature of experience, by setting up a purelytheoretical security and certainty. The influence of this attemptupon the traditional philosophic preference for unity, permanence,

155. RICHARD RORTY, CONTINGENCY, IRONY AND SOLIDARITY 4-5 (1989). Rorty argues:We need to make a distinction between the claim that the world is out there and theclaim that the truth is out there. To say that the world is out there, that it is not ourcreation, is to say, with common sense, that most things in space and time are theeffects of causes which do not include human mental states. To say that truth is not outthere is simply to say that where there are no sentences there is no truth, that sentencesare elements of human languages, and that human languages are human creations.

Id.156. MENAND, supra note 11, at 356.157. WILLIAM JAMES, What Pragmatism Means, in THE WRITINGS OF WILLIAM JAMES 379

(John J. McDermott ed., 1977).

158. Id.159. DEWEY, supra note 2, at 42.160. Id. at 50.

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universals, over plurality, change and particulars is pointed out, aswell as its effect in creating the traditional notion of substance, nowundermined by physical science. 16 t

How did (and does) pragmatism suggest we deal with issues of con-tingency and morality? What is clear is it is not by an appeal to anykind of idealism. The essence of pragmatism is its lack of adherenceto any particular dogma; we can characterize it as a philosophy underwhich you do whatever works to accomplish the end you want to ac-complish. Like his philosophical predecessors, Dewey linked his epis-temology to his moral theory. 162 Getting wrapped up in whether anidea corresponds to the reality of existence is a waste of time. Better

161. Id. at iii-iv. This passage, written in 1929, speaks volumes about Dewey's linkage of

Kant and Hegel to the scientific discoveries of the early twentieth century. Dewey studied Kant

and Hegel at Johns Hopkins, and was particularly influenced by Hegel's philosophy of history.

MENAND, supra note 11, at 261-72. Dewey could be characterized asa serious person, too. He wasn't interested in philosophy as a form of mental exercise.

He was interested in it as a guide to living, and Hegel turned out to be just what he was

looking for. Hegel's philosophy made a much closer corollary to Huxley's picture of

the body as an integrated organism than Torrey's attenuated Kantianism had.Id. at 266.

Dewey is thus clearly referring to Hegel's "elimination of the contingent" when he describes

philosophies of theoretical security and certainty. See DEWEY, supra note 2, at 50. It would also

appear that he is referring to Kant, particularly as to substance, which Kant includes as one of

the a priori categories by which our minds organize the world. KANT, supra note 134, at 59.

Moreover, there can be little doubt about the notions of substance being undermined by physical

science at the time. Max Planck first proposed quantum theory in 1900. TIMOTHY FERRIS, COM-

ING OF AGE IN THE MILKY WAY 286 (1988). In 1927, Werner Heisenberg announced the inde-terminacy principle, that the very act of observing makes it so we can either know the positon of

a particle or its trajectory, but not both. Id. Quantum physics undermined the very cause and

effect at the heart of classical physics:Classical physics was deterministic: If A, then B; the bullet fired at the window shattersthe glass. On the quantum scale this is only probably true: Most of the particles in the

bullet encounter those of the glass, but some go elsewhere, and the trajectory of anyone of them can be predicted only by invoking the statistics of probabilities. Einsteinwas deeply troubled by this aspect of the new physics. "God does not play dice," he

said, and he argued that the indeterminacy principle, though useful in practice, does notrepresent the fundamental relationship between mind and nature.

Id. at 290. In short, science was undermining not just prior science, but the a priori assumptions

of philosophers on matters as basic as substance and causation. No wonder, then, that Dewey,writing in 1929, might be inclined to reject philosophic speculation about the fundamental nature

of the world in favor of a pragmatic thought.162. Dewey stated:

The facts of the ungoing, unfinished and ambiguously potential world give point and

poignancy to the search for absolutes and finalities. Then when philosophers have hitin reflection upon a thing which is stably good in quality and hence worthy of persistent

and continued choice, they hesitate, and withdraw from the effort and struggle that

choice demands:-namely, from the effort to give it some such stability in observedexistence as it possesses in quality when thought of. Thus it becomes a refuge, an asy-

lum for contemplation, or a theme for dialectical elaboration, instead of an ideal toinspire and guide conduct.

DEWEY, supra note 2, at 53.

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to avoid the dangers of philosophic contemplation of truth (with itsinherent tendency to find absolutes and extremes), and simply act inthis world to make things better. 163 Approaching contingency solelythrough reason explains but does no more; its ultimate expression issuperstition or religion. 164 Compared to the subjective musings ofphilosophy, the inquiries of science, which reach objectively into na-ture, are better "because reached by method which controls them andwhich adds greater control to life itself, method which mitigates acci-dent, turns contingency to account, and releases thought and otherforms of endeavor."'1 65

In 1891, James spoke similarly of the role of idealistic philosophy tomorals:

[Intuitional or idealist thinkers] deserve credit for keeping mostclearly to the psychological facts. They do much to spoil this meriton the whole, however, by mixing it with that dogmatic temperwhich, by absolute distinctions and unconditional 'thou shalt nots,'changes a growing, elastic, and continuous life into a superstitioussystem of relics and dead bones.... There is but one unconditionalcommandment, which is that we should seek incessantly, with fearand trembling, so to vote and act as to bring about the very largesttotal universe of good which we can see. 166

163. See id. at 52-77.164. Id. at 52 (stating that "[t]he consequence [of pure metaphysics] is that conversion of

unavowed morals or wisdom into cosmology, and into a metaphysics of nature, which wastermed in the last chapter the philosophic fallacy").

165. Id. at 70. This same point served as the basis for Dewey's educational philosophy:[T]he difference in abstract principles will not decide the way in which the moral andintellectual preference involved shall be worked out in practice .... I take it that thefundamental unity of the newer philosophy is found in the idea that there is an intimateand necessary relation between the processes of actual experience and education.

JOHN DEWEY, EXPERIENCE AND EDUCATION 20 (1997) (1938).166. WILLIAM JAMES, The Moral Philosopher and the Moral Life, in THE WRITINGS OF WIL-

LIAM JAMES, supra note 157, at 625-26. As noted in MENAND, supra note 11 and accompanyingtext, James viewed the question of whether a particular belief was justified as one distinct fromwhether it was true. Among those characterized as pragmatists, there is a wide divergence ofviews on the utility of beliefs. Richard Rorty, for example, argues that our beliefs are the prod-uct of our language and culture, and hence themselves are contingent on changes in languageand culture from one period to the next. See RORTY, supra note 155. Hence, he claims that therecognition of that contingency is the chief virtue of a liberal society in which metaphysical needshave disappeared. Id. Compare this to Dewey's view of the role of ideals in experience, quotedpartially as the introduction to the Article:

A particular ideal may be an illusion, but having ideals is no illusion. It embodiesfeatures of existence. Although imagination is often fantastic it is also an organ ofnature; for it is the appropriate phase of indeterminate events moving toward eventual-ities that are now but possibilities. A purely stable world permits of no illusions, butneither is it clothed with ideals. It just exists. To be good is to be better than; and therecan be no better except where there is shock and discord combined with enough as-sured order to make attainment of harmony possible.

DEWEY, supra note 2, at 62.

1112


With this brief grounding in the philosophy of utility, morality, andcontingency, we turn finally to its expression in the current literatureof the law and how it might impact the lawyer working ex ante to getdeals done.

III. A PHILOSOPHY OF CONTINGENCY FOR THE DEAL LAWYER

A. The Mix of Contractual and Non-Contractual Contingenciesin Complex Transactions

In Part II.A, I touched on the sheer complexity of contracts used incomplex business transactions. I concur, however, with the sociologi-cal observations that the role of the law in such transactions is hardlyas central as either the lawyers or legal scholars might presume it tobe. It would be disingenuous to suggest that the power of the state toenforce adjudicated contract rights has no consequence. But contractscreate moral markers as much as legal rights and duties. The realworld of M&A work or the creation of a high technology businesscannot be modeled by solely legal or even economic rules. There istoo much contingency and too broad a range of conceivable outcomes.For the uninitiated, what follows is a brief and anecdotal sense of thenon-legal contingencies, those not addressed by traditional law andeconomics models of contract, faced by participants (including law-yers) in those worlds. 167

1. Contingency in Mergers and Acquisitions

The deal that resulted in the famous Texaco-Pennzoil litigation notonly demonstrates the matrix of legal and non-legal contingency that

167. I focus on these two areas because they are the ones with which I have the most experi-

ence. Lisa Bernstein has studied a series of other complex and close-knit business communities,

focusing on the legal and extra-legal norms by which they deal with the contingencies of their

businesses. See, e.g., Lisa Bernstein, Opting Out of the Legal System: Extra-Contractual Rela-tions in the Diamond Industry, 21 J. LEGAL STUD. 115 (1992).

The complexity of the role of extra-legal norms, including the so-called incommensurability

thesis, has long been the subject of debate among legal scholars. Professor Sunstein wrote the

seminal work, arguing that there is a theory of choice among a range of incommensurable values

and options that can account for people's social behavior. See generally Cass R. Sunstein, In-commensurability and Valuation in Law, 92 MICH. L. Rav. 779 (1994). Eric Posner argues, onthe other hand, that we may observe what looks like incommensurability, but it is a mistake to

assume that this is based on values, as opposed to rational calculation of economic or reputa-tional gain. POSNER, supra note 5, at 185-202. Posner takes a game theoretical approach to non-

legal norms, arguing that being perceived by others as a good type is instrumental-it furthers

our interests-and a good type, in the course of the game, engages in "signaling" to the other

players that he or she is in fact a good type. Id. at 18-27. I obviously weigh in on the Sunstein

side of the debate, and I believe that the anecdotes in the next section provide at least some

support for that argument.

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acquisitions lawyers and dealmakers face, but also the danger ofthinking about contingency only as a lawyer might. Texaco acquiredGetty Oil in 1983. Two years later, a state court jury in Houstonawarded Pennzoil, the outbid suitor, breach of contract damages inexcess of $7 billion and punitive damages in excess of $3 billion on acontract that had never been signed. 168

In the early 1980s, effective control of Getty Oil, a public company,resided in two parties: Gordon Getty, the intellectual son of J. PaulGetty, and the board of trustees of the J. Paul Getty Museum. 169

Through family trusts, Getty controlled forty percent, and the mu-seum owned twelve percent of the common stock of Getty Oil.170Without getting into the myriad details of motivating factors, 71 overthe several days following New Year's Day 1983, Getty Oil was on thebrink of being sold to Pennzoil. 172

The negotiations culminated in a twenty-five hour session on Janu-ary 3 and 4, 1983. Liedtke had offered $100 per share for Getty Oil,and, unknown to the Getty Oil board, had privately executed a shortmemorandum of agreement with Gordon Getty for his support of thesale at that price, and his commitment to urge the museum to do thesame. 173 In exchange, Getty would be the chairman of the mergedcompany. 174 The museum, represented by Lipton, separately negoti-ated an additional $10 per share.175 All of this was presented to theGetty Oil board of directors, most of whom believed the company wasundervalued at either $100 or $110, with a time limit under which theoffer would be withdrawn if not accepted before the board meetingwas adjourned. 176

168. See THOMAS PETZINGER, JR., OIL AND HONOR: THE TEXACO-PENNZOIL WARS (1987).This may be the single best book about deals and litigation I have ever read. Its size, fact situa-tion, and outcome are pathological, but almost every deal lawyer can identify with the whirl ofevents, adrenaline rush, and confusion. All litigators should read the first half to understand thedynamics of dealmaking, and all transactional lawyers should read the second half to understandhow what they do, legally and non-legally, can be perceived by ordinary people.

169. Id. at 88.170. Id.171. See id. at 13-154 (e.g., the dysfunctional Getty family, Gordon Getty's unsuitability to

run the company, the "eat or be eaten" acquisition craze in the oil business in the early 1980s,the mercurial and acquisitive chairman of Pennzoil, Hugh "Chairman Mao" Liedtke).

172. Id. at 158.173. PETZINGER, supra note 168, at 161.174. Id.175. Id.176. Petzinger recorded the director's reaction to the offer and the deadline as follows:

This is blackmail! many of the directors thought.Henry Wendt [a director] was convinced that Gordon was selling the public share-

holders down the river simply to achieve a long-coveted ambition to become chairman

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During the meeting, the Getty board pressured Getty to negotiatean additional $10 to bring the price to $120 per share, arguing thatalthough Salomon Brothers may have assured the museum $110 wasfair (on only two days' study), Goldman Sachs had not done the samefor the public shareholders, whom the Getty board represented. 177

Only then did Gordon Getty reveal his private agreement withLiedtke, and there was rancorous fallout among the directors.178 Asthe board meeting continued through the early morning hours, Lip-ton, representing the museum and sensing that the deal was fallingapart, suggested to the Getty Oil board that it consider going back toPennzoil with a creative structure of cash and debentures valued at$120.179 The Getty board approved this at 2:30 a.m., and the invest-ment bankers prepared a handwritten letter, which was left with thePennzoil banker at 4:30 a.m.180

The next day, before the Getty board reconvened at 3:00 p.m.,Liedtke and Pennzoil's team, including its lawyer, Arthur Liman,made a complex counteroffer at either $110 a share, or $90 per shareplus the proceeds of a spin-off of a Getty subsidiary that would becompleted after the sale. 181 Lipton told Liman "It won't sell ... It'stoo cute."'182 Liman went back to Liedtke and secured authority tobump the value of an offer up to $111.50.183 Lipton asked Liman tomake it $112.50.184 Liman said he would not go back to Liedtke with-

of the board. "Do you know what this company is worth?" he demanded. "Have youtried to shop the company?"

"I've considered and rejected many things," Gordon calmly answered. "This ap-proach is best." Another recess, during which the finger sandwiches and little weeniescame in.

Dr. Laforce of UCLA [a director] resented the whole thing. "We're being placed ina position of having to make a decision in three or four hours on a take-it-or-leave-itbasis," he said. "This involves enormous sums of money and some complex issues.Why was this proposal structured to be withdrawn if it wasn't accepted right now?"

"In the terms of the trade," explained Boisi of Goldman, Sachs, "Pennzoil is using a'bear hug.' They're using speed and pressure to get a good deal for themselves. That'sthe tactical reason for putting a deadline on the deal."

Id. at 174-75.

177. Id. at 177.

178. Id. at 179-80.

179. PETZlNGER, supra note 168, at 180.

180. Id. at 181-82.

181. Id. at 186.

182. Id.

183. Id. at 187.

184. Id.

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out a firm deal.185 Lipton agreed to seek the Getty board'sapproval.186

Liman waited while the board listened to Lipton, the lawyer for themuseum and a twelve percent shareholder, present the $112.50 of-fer. 187 After a raucous three-hour session that pitted the Getty direc-tors against their own investment bankers (who would not call theoffer fair), the board approved a $112.50 sale of the company by a15-1 vote.188 Liman testified later that the "doors flew open," and heheard from either Lipton or Martin Siegel, Gordon Getty's invest-ment banker, "Congratulations, Arthur, you've got yourself a deal." 189

Whether many hands were shaken was later a matter of dispute. 190

But no document was signed. In the next two days, Bruce Wasser-stein, then at First Boston, contacted Lipton and eventually engi-neered the deal in which Texaco trumped Pennzoil and acquiredGetty Oil for $125 per share, and the litigation ensued.191

The centrality (or lack thereof) of law as the means by which con-tingency is addressed in a transaction, at least as perceived bynonlawyers, is evident from the account of Lipton's cross-examination(by Joe Jamail) on the question of whether he and Arthur Liman hada deal. Lipton had testified on direct examination to the effect thatthere could not have been a binding deal as of the conclusion of theboard meeting because "in his opinion Gordon could never have com-pleted the Pennzoil deal without hiring lawyers who specialized incomplex oil-and-gas transactions."'192 The following examinationensued:

"Are you saying that two people cannot agree unless they hire abunch of lawyers to tell them they've agreed?" Jamail demanded.

"I'm not saying that at all, Mr. Jamail. I'm saying that two peoplewho are contemplating an agreement with respect to a ten-billion-dollar transaction would be awfully foolish to do it on the basis ofan outline and the absence of an expert's advice ......

Jamail knew what he wanted."Mr. Lipton," he said, glaring, "are you saying that you have

some distinction between just us ordinary people making contractswith each other, and whether or not it's a ten-billion-dollar deal? Isthere a different standard in your mind?"

185. PETZINGER, supra note 168, at 187.186. Id.187. Id. at 188.188. Id. at 191.189. Id. at 192.190. Id. at 186-93.191. PETZINGER, supra note 168, at 193-234.192. Id. at 371.

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"Yes, indeed."

"At that point," juror Jim Shannon would recall, "my jaw justdropped."

Jamail waited a full five seconds to let the response sink in."Oh," Jamail said. "I see.""So if it wasn't a bunch of money involved in this Getty-Pennzoil

transaction, it could be an agreement?""Well, if there was five or ten dollars involved, I guess you might

say that."In fact, Lipton was articulating a legal principle codified in 17th

century England and known as the Statute of Frauds, which heldthat complex transactions of great size or complexity do impose ahigher degree of agreement. But as far as the jury was concerned,Marty Lipton had just made honor in business contingent on thenumber of dollars involved.' 93

When Martin Lipton got the call from Bruce Wasserstein, he usedhis lawyer's model of contracts and contingency to conclude that therewas no deal. 194 As the jury verdict proved, the public did not necessa-rily agree.

James Freund, one of the great M&A lawyers (and one of the bestand most prolific theorists, raconteurs, and authors on the subject ofgetting deals done) described the relationship of legal and non-legalskills in negotiating a complex merger:

Unlike a work on abstract legal principles or such related practicalmatters as structuring a merger, as to which there are certain objec-tive criteria for judgment, this subject often boils down simply to amatter of "feel," based on experience-as to where, for example, aparticular line can and should be drawn, to compromise opposingviewpoints while adequately protecting each of the parties. Otherpractitioners would undoubtedly take different stands on specificmatters, and needless to say, each reader is encouraged to seek hisown level. There is no "right" position on, or solution to, the typicalnegotiating problem. To achieve workable compromises and con-summate deals, you must dismiss all rigid postures from your mind

193. Id. Compare this story to the assessment of the role of the U.C.C. Statute of Frauds in a

model that assumes people are rational actors, and whether judicial approaches to its applicationimpact behaviors. See generally Eric A. Posner, Norms, Formalities and the Statute of Frauds: A

Comment, 144 U. PA. L. REV. 1971 (1996). Getty Oil and Pennzoil did not have a signed writing,

definitive or not, because: (1) At least one side believed its handshake was its bond; (2) thedirectors and lawyers were exhausted after all-night sessions; (3) the lawyers worked on docu-ments through another all-night session after the board meeting because they were not sure what

happened in the board meeting; and (4) in the flurry of the conclusion of the board meeting,

nobody from Getty Oil stopped to sign the five page memorandum of understanding (albeit atthe $110 per share price) already signed by Gordon Getty and Hugh Liedtke. PETZINcER, supra

note 168, at 191-99.194. PETZINGER, supra note 167, at 202.

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and roll with the punches, adapting yourself to the situation andyour opposite number....

There is a great intermeshing of disciplines in connection with amerger negotiation. My experience is that everyone else involved-accountants, businessmen, investment bankers-contribute ideasthat could be termed "legal," while the lawyer himself is frequentlypointing out considerations that could be considered "accounting"or "business" or "financial." If there is to be real teamwork, it isimportant that everyone concerned have an inkling of what is goingon in the lawyer's mind in connection with making a deal.195

Freund's point is the same one raised in the outset of this Article,and is not a legal or economic question, but one of philosophy. How,in the face of great contingency, legal and otherwise, do we decidewhen to be rigid, to hold to our view of the world as it ought to be, orflexible, to conclude that the world as it is may be alright? How do wegather the psychic energy to find the creativity to bridge gaps betweenthe parties, or do we simply accept the fact that there is a gap and gohome?

2. Contingency in Start-ups and Venture Capital

There are massive contingencies in starting a business and funding itwith venture capital financing, but almost none of them (save patentprotection) are addressable by law. As Freund described for mergers,there are basic start-up structures as to which there are almost objec-tive criteria, involving the ratio of the funds invested to fully dilutedequity position in convertible preferred stock, or straight preferredwith equity warrants. 196 In addition, there are relatively standard liq-uidation preferences, anti-dilution, and other rights.197 Negotiationoccurs largely along the kinds of complexity axes described earlier. 198

One venture capitalist's conception of the contingency he faces ininvesting is merely a restatement of the gap between "is" and "ought."Thus, "In an ideal world, all of the firm's investments would be win-ners. But the world isn't ideal; even with the best management, theodds of failure for any individual company are high. On average,good plans, people, and businesses succeed only one in ten times." 199

The reason lies in the factors that can go wrong: sufficiency of capital,management's capability and focus, product development going asplanned, production and component sourcing going as planned, com-

195. FREUND, supra note 12, at 2, 4-5.196. Bob Zider, How Venture Capital Works, HARV. Bus. REV., Nov.-Dec. 1998, at 131,134.197. Joseph B. Hoffman & Richard G. Chisholm, Trends in Venture Capital Financing Terms,

METROPOLITAN CORP. COUNS., Apr. 2002, at 14.198. See Eggleston et al., supra note 12 and accompanying text.199. Zider, supra note 196, at 136.

[Vol. 54:10771118


petitors behaving as expected, customers wanting the product, pricingforecast correctly, and patents being issued and enforceable. Assum-ing that these are independent events, the failure of any single factor

means the failure of the company, and even in the best companies the

odds are only four to one (eighty percent) on each factor, then the

best probability of success is about seventeen percent.200

In their study of law firms in Silicon Valley, Mark Suchman and Mia

Cahill directly addressed the nature of transactional uncertainty and

the rational actor model. 20 1 They distinguish "risk"-the probabilisticuncertainty within a known range of options and outcomes-from un-

bounded "uncertainty"-when neither the full range of options nor

the relative probability of alternative outcomes can be known.202

Unlike risk, uncertainty is deeply incompatible with the neoclassicalmodel of fully rational decision-making. Instead of producing acareful expected-utility analysis of all lines of action, conditions ofuncertainty tend to produce "boundedly rational" decision strate-gies, involving "good enough" choices, gut feelings, and rules ofthumb. At a more macroscopic level, uncertainty elevates transac-tion costs and exacerbates intra-organizational strains and powerstruggles. Consequently, unresolved uncertainty poses a fundamen-tal cognitive and organizational obstacle to the formation and main-tenance of stable markets for high-technology start-up capital. 20 3

As we will see, the contribution of lawyers in this environment is sig-

nificantly different than the predictors of possible ex post interpreta-tions of their agreements. They are contributors to the creativeprocess-helping to bring their clients a little closer to the ideal worldwhere companies do not fail.20 4

3. The Question that Derives from the Empirical Observation

Having reviewed the theoretical limitations of the private law of

contracts and the rational actor model to take account of very com-

plex state contingencies, and having observed transactional complex-ity, of which legal uncertainty is merely a subset of total uncertainty,to what discipline may legal scholars and practitioners turn for expla-

200. Id. For other sources helpful in getting a sense of the breadth of contingency not ad-

dressable by law, see BAGLEY & DAUCHY, supra note 19, at 1-8; C. GORDON BELL & JOHN E.

MCNAMARA, HIGH-TECH VENTURES: THE GUIDE OF ENTREPRENEURIAL SUCCESS (1991);

MICHAEL LEWIS, THE NEW NEW THING: A SILICON VALLEY STORY (2000); Tom Elfring & Wil-

lem Hulsink, Networks in Entrepreneurship (May 2001), available at http://ssrn.com/abstract=37

0887.201. Mark C. Suchman & Mia L. Cahill, The Hired Gun as a Facilitator: Lawyers and the

Suppression of Business Disputes in Silicon Valley, 21 LAW & Soc. INQUIRY 679 (1996).

202. Id. at 688-89.203. Id. at 689 (footnotes omitted).204. See infra Part III.C.2.

11192005]


nation and guidance? In the following sections, I review two pro-posed approaches suggested by my earlier summary of moralphilosophy, legal pragmatism (moderate and Posnerian) and the lim-ited idealism of Kant.

B. A Critique of the New Orthodoxies

We can trace the modern legal pragmatism of Judge Posner andothers back to the American pragmatists of the late nineteenth cen-tury. Justice Holmes was a contemporary, correspondent, and col-league of James and Dewey, and his philosophy of law reflected ashared pragmatism.205 Justice Holmes's The Path of the Law is as firmas the writing of Dewey and James in holding experience above ab-stract ideals in determining what the law should be. 2°6

There are two primary ironies in the fact that the self-styled heirs toJustice Holmes reject any role for philosophy in the understanding ofcontingency. The first is apparent from internecine debates amongthe legal pragmatists themselves. Those radical pragmatist skeptics,like Judge Posner, who are so firmly wedded to the scientifically de-rived laws of economics as the one true determinant of human interac-tion and welfare, are viewed by their more moderate brethren as iconsof the very dogmatism that the original pragmatists deplored.207 The

205. For an entertaining history of this relationship, see MENAND, supra note 11, at 3-69.Menand observes that Holmes's particular aversion to absolutism was shaped by his experienceas a young officer in the Civil War.

206. Oliver Wendall Holmes, The Path of the Law After One Hundred Years, 110 HARV. L.REv. 991, 998 (1997), originally published, 10 HARV. L. REV. 457 (1897). Holmes wrote:

The language of judicial decision is mainly the language of logic. And the logicalmethod and form flatter that longing for certainty and for repose which is in everyhuman mind. But certainty generally is illusion, and repose is not the destiny of man.Behind the logical form lies a judgment as to the relative worth and importance ofcompeting legislative grounds, often an inarticulate and unconscious judgment, it istrue, and yet the very root and nerve of the whole proceeding. You can give any con-clusion a logical form. You always can imply a condition in a contract. But why do youimply it? It is because of some belief as to the practice of the community or of a class,or because of some opinion as to policy, or, in short, because of some attitude of yoursupon a matter not capable of exact quantitative measurement, and therefore not capa-ble of founding exact logical conclusions. Such matters really are battle grounds wherethe means do not exist for determinations that shall be good for all time, and where thedecision can do no more than embody the preference of a given body in a given timeand place. We do not realize how large a part of our law is open to reconsiderationupon a slight change in the habit of the public mind. No concrete proposition is self-evident, no matter how ready we may be to accept it, not even Mr. Herbert Spencer'sEvery man has a right to do what he wills, provided he interferes not with a like righton the part of his neighbors.

Id.207. See infra notes 218-234 and accompanying text.

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second irony is far more subtle.208 Both schools of pragmatism, themoderate and the skeptical, reject any role for nonempirical reason in

the determination of moral ends, placing Kant's philosophy in that

school. Yet a careful reading of Kant, and subsequent and more ac-

cessibly written restatements of his philosophy, shows that Kant him-

self would have rejected the extreme skepticism of Judge Posner as a

new dogmatism.20 9 Indeed, we can view Kant's philosophy of contin-

gency as the very pragmatic idealism we would expect to see in a law-

yer who is not only capable of deciding and interpreting ex post, but of

creating value ex ante.

1. Legal Pragmatism at War with Itself

One of the problems in describing legal pragmatism is the breadth

of thought subsumed within it, and the number of legal scholars who

characterize themselves as legal pragmatists. At least one scholar has

attempted to state a common denominator. 210 Legal pragmatists, like

their philosophical antecedents, believe knowledge is "contextual"-embodied in language, experience, culture, and practice-and "instru-

mental"-meaningful only as a tool to solve real problems.211 In par-

ticular, all pragmatists would reject that part of Kant's philosophy that

attributes any ability of reason to access truth or morality (pure or

practical reason) either because they deny the existence of an external

reality accessible only by reason, or if they do not deny it, they do not

believe it has any value in addressing the problems of contingency:

This is not to suggest that the pragmatist denies the existence of aworld external to the human mind. For the pragmatist, however,classifying statements as true by virtue of their correspondence toexternal reality is simply not a productive activity. The pragmatistsuggests that we would be better off if we abandoned attempts toground our beliefs in some external reality, and that the task of phi-losophers, poets, and scientists (and, I would add, of lawyers andjudges as well) is to come up with better ways of helping us to copein the face of radical uncertainty. 212

As a general statement, pragmatists employ a methodology in

resolving legal issues that rejects the grounding of law in any single

overriding value, doctrine, policy, or set of principles. 213 They look to"practical reason," but not the practical reason that Kant holds may

208. See infra notes 210-217 and accompanying text.209. See infra notes 236-266 and accompanying text.

210. See generally Thomas F. Cotter, Legal Pragmatism and the Law and Economics Move-

ment, 84 GEO. L.J. 2071 (1996).211. Id. at 2075-79.212. Id. at 2075-76 (footnotes omitted).213. Id. at 2082-85.

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access a priori moral imperatives. 2 4 It is instead "intersubjective un-derstanding through 'dialogue, conversation, undistorted communica-tion, communal judgment, and the type of rational wooing that cantake place when individuals confront each other as equals and partici-pants."' 215 And legal pragmatists reject sharp distinctions betweenends and means:

[G]oals themselves are never final; "they are at best momentaryresting points whose attainment has further foreseeable conse-quences desirable or undesirable; hence they must themselves beevaluated as means relative to those consequences." Similarly, themeans we select to accomplish our ends are not exclusively instru-mental; "activities, however instrumentally conceived, are to beevaluated by their intrinsic satisfactions or frustrations as well as bytheir consequences." 216

In short, the moderate and benign view of pragmatism is that it rec-ognizes the complexity of human experience and rejects almost no ap-proach that might aid us in dealing with contingency: "Pragmatismrecognizes that no one way of analyzing a problem captures every-thing, but rather that any method illuminates and privileges some phe-nomena and some values while obscuring and denying others. '217

Legal pragmatism takes a far more acerbic and strident turn in thewritings of Judge Posner, whose skepticism is far more radical and ab-solute than the benign and open spirit of questioning that emanatesfrom other legal and philosophical pragmatics. 218 His two recent

214. See infra notes 247-260 and accompanying text.215. Cotter, supra note 210, at 2087 (quoting RICHARD BERNSTEIN, BEYOND OBJECriVISM

AND RELATIVISM 223 (1983)).216. Id. at 2093 (quoting Thomas C. Grey, Holmes and Legal Pragmatism, 41 STAN. L. REv.

787, 852 (1989)).217. Id. at 2141.218. It is hard not to be overwhelmed by the sheer power of Judge Posner's breadth of knowl-

edge and persuasive passion, part of which, I believe, is the result of his certainty in the rightnessof his position. As an example, the following is his assessment of the value of moral philosophy,in a nutshell:

It is because of the importance of distinguishing the moral entrepreneur from othermoralists that I define my main target in this chapter as academic moralism. Moralentrepreneurs play a role in the evolution of morality; other moralists do not; and themodern university professor is prevented by the character of a modern academic careerfrom being a moral entrepreneur, with rare and largely irrelevant exceptions. Earliermoralists-the authors of the classic works of moral philosophy, such as Plato, Hume,Bentham, Kant, and Mill-were for the most part not professors (though Kant was)and in any event lived in times when knowledge was less specialized and esoteric andthe line between theory and practice much less distinct. The modem moral philosopheris firmly imprisoned in an ivory tower.

RICHARD A. POSNER, THE PROBLEMATICS OF MORAL AND LEGAL THEORY 8 (1999). He alsomakes typically broad empirical statements about lawyers, judges, and philosophy: "[Orthodoxpragmatism] has become a part of technical philosophy, in which few judges or practicing law-

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works, The Problematics of Moral and Legal Theory219 and Law,

Pragmatism, and Democracy,220 set forth a theory that he describes as"pragmatic moral skepticism" 221 and apply it to issues as diverse as

legal professionalism, 22 2 euthanasia, 223 constitutional theory,224 anti-

trust,225 legal positivism, 226 President Bill Clinton's impeachment, 227

and Bush v. Gore.22 8 While whole armies of scholars are no doubt

thankful to Judge Posner for providing a juicy foil, 229 I address only

the very broad issue of "pragmatic moral skepticism" as I believe it

impacts addressing contingency in the practice of complex deal law.

What is clear is that Judge Posner's approach to moral philosophy is

not even pragmatically agnostic. His is a purely scientific approach-

despite his claim to the contrary. He does not object to theory as

such: "Economic theory, and the parts of the natural sciences with

which I have at least a nodding acquaintance, such as evolutionary

yers take any interest." POSNER, supra note 14, at 41. "[A]cademic philosophy [is] a field that

has essentially no audience among judges and lawyers." Id. at 11.

I hardly consider myself as having been imprisoned in an ivory tower, and would defer to

Judge Posner on any empirical observation about the behavior of judges. I do not apply the

same level of deference, however, about empirical observations of practicing lawyers. Practicing

lawyers do not think about philosophy in their work, on the whole, any more than they consider

microeconomics, game theory, chaos theory, or other scholarly attempts to make sense of, and

predict, what they do and why. But I do see a connection between moral philosophy and the

real world. I have seen real world business executives demonized and ultimately consumed by

an inability to reconcile the "is" and the "ought," the randomness of nature against the order our

minds attempt to construct around it. I have also seen real world business executives who con-

tent themselves with, and find a way to justify, the world as it is. My casual empiricism tells me

both fail as leaders. My goal is to place these empirical observations in a scholarly framework at

least as legitimate as economic analysis. Outside legal and economics scholarship, Adam Smith

is not the only eighteenth century thinker whose ideas are still considered worthy of application

to our world; people still read Hume and are persuaded by his skepticism, or read Kant and are

moved by his explanation of idealism.

219. See POSNER, supra note 218.

220. See POSNER, supra note 14.221. POSNER, supra note 218, at 8-13.

222. Id. at 185-226.223. Id. at 128-34.224. Id. at 144-82.225. POSNER, supra note 14, at 234-47.

226. Id. at 250-91.227. Id. at 213-34.228. Id. at 322-56.

229. Problematics and the article on which it was based have generated many thousands of

words in response. One issue of Volume 111 of the Harvard Law Review is devoted almost

entirely to the original article, reactions of a number of other scholars, and Judge Posner's reply.

See generally, e.g., Charles Fried, Philosophy Matters, 111 HARV. L. REV. 1739 (1998); Anthony

T. Kronman, The Value of Moral Philosophy, 111 HARV. L. REV. 1751 (1998); Nussbaum, Still

Worthy, supra note 114. Book reviews include John Mikhail, Note, Law, Science and Morality: A

Review of Richard Posner's The Problematics of Moral and Legal Theory, 54 STAN. L. REV. 1057

(2002), and Jeremy Waldron, Ego-Bloated Hovel, 94 Nw. U. L. REV. 597 (2000).


biology, seem to me both beautiful and useful. '230 But as Judge Pos-ner's epistemology is traditionally empirical, his theory is only validwhen "it is about observable phenomena and 'real' (physically ex-isting), entities [and] can be tested by comparing the predictions gen-erated by the theory with the results of [the] observation[s]. '231 As towhat we can know of the world a priori solely by our reason, JudgePosner is a child of Hume: "Neither logic nor any empirical protocolguarantees truth. So even scientific knowledge is tentative, revis-able-in short, fallible. '232

But as to moral philosophy, there is no doubt:

230. POSNER, supra note 218, at 13. Why a committed pragmatic moral skeptic like JudgePosner would express the judgment that a theory is "beautiful" in addition to "useful" is in factthe subject of Kant's Critique of Judgment, the third of his "Critical Works." See generally IM-MANUEL KANT, Selections from Critique of Judgment, in BASIC WRITINGS OF KANT, supra note134, at 273. His answer lies in the paradox presented by the fact that our judgment is clearly ourown and subjective, yet it purports to look at the world and make an objective statement that thepleasing aspect of the thing observed is universal. In the interest of full disclosure, Hume notedthe same paradox, disclaiming any role of reason in assessing the beautiful. See generally DavidHume, Of the Standard of Taste, in FOUR DISSERTATIONS (1757), excerpted in PHILOSOPHY: BA-sic READINGS, supra note 133, at 393-408. He concluded instead that what we perceive as beau-tiful is simply that which has been so perceived in all ages and all countries. Id. But noteveryone, according to Hume, can discern beauty. It is a matter of having "delicacy of imagina-tion," "practice in a particular art," "opportunity of comparing the different kinds of beauty,"and "a mind free from all prejudice." Id. Men labor to achieve all of these skills, which aloneentitle one to adjudge the "true standard of taste and beauty." Id. at 403. Asks Hume, "Butwhere are such [men] to be found? By what marks are they to be known? How distinguish themfrom pretenders? These questions are embarrassing .... Id. I leave the answers to thosequestions to the rational actor theorists.

231. POSNER, supra note 218, at 13. The devotion to scientific method as the sole determinantof pragmatic truth is echoed in other treatments of law and economics. In responding toAmartya Sen's theory of commitment as an alternative to the rational actor model to explainaltruism, Eric Posner wrote: "The problem with Sen's argument ... is that simply assuming thatpeople operate out of principle and rational calculation gives one less methodological purchasethan the ordinary rational choice assumptions do, without, as far as I can tell, compensating forthis loss by producing a methodological gain." POSNER, supra note 5, at 146. See generallyAmartya K. Sen, Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,6 PHIL. & PUB. AFF. 317 (1977).

232. POSNER, supra note 14, at 6. Judge Posner's epistemology, if not his moral theory, seemsto have taken a turn in the four years between Problematics and Pragmatism. In the former, helabels himself a "pragmatic moral skeptic." POSNER, supra note 218, at 8. In the latter, he claimsnot only not to be a skeptic, but also to be affirmatively antiskeptical. POSNER, supra note 14, at7. He claims not to be a radical skeptic because such a person would not be skeptical about hisskepticism. Id. Pragmatists, like Judge Posner, apparently merely "doubt that skepticism orrelativism can be proved to be wrong." POSNER, supra note 14, at 8. Contrast this with theabsolute and non-skeptical views about moral philosophy described in the text. Note also thatthe epistemological issue of the skeptic's ability even to pose the skeptical question is the funda-mental issue of the Critique of Pure Reason. "What are the presuppositions of experience?What has to be true if we are to have even that bare point of view which the skeptics ascribe tous?" Scruton, supra note 148, at 28-29.

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And however all this may be, academic moralism has no prospect ofimproving human behavior. Knowing the moral thing to do fur-nishes no motive, and creates no motivation, for doing it; motiveand motivation have to come from outside morality. Even if this iswrong, the analytical tools employed in academic moralism-whether moral casuistry, or reasoning from the canonical texts ofmoral philosophy, or careful analysis, or reflective equilibrium, orsome combination of these tools-are too feeble to override eithernarrow self-interest or moral intuitions.233

In this again, Judge Posner descends directly from the skepticism of

Hume, who famously described reason as the slave of the passions.234

The point is that the very absolutism that spurred philosophic prag-

matism appears in the absolute rejection of any role that philosophy

might play in explaining contingency and prescribing the role of law-

yers in addressing it. Even those who would otherwise describe them-

selves as legal pragmatists turn squeamish with the elevation of

economic theory as the predominant explanatory model of humanactivity.

235

2. The Kantian Critique

Kant's impulse to his critical philosophy was, by all readings, similar

to the impulse of the skeptics or the pragmatists. But it is far more

subtle, and more difficult to grasp, and in many ways far more unsatis-fying, than either form of dogmatism: An absolutist explanation ofeverything in the world or an absolutist denial that anything can be

explained. Some things can be explained, and some things cannot.

To make this clear, we first need to delve a little deeper into the way

Kant explains moral law and how it relates to knowledge. In Kant'sfamous words, Hume's work awakened him from his "dogmatic

233. POSNER, supra note 218, at 7.

234. SUSAN NEIMAN, THE UNITY OF REASON: REREADING KANT 34-35 (1994); see Nuss-

baum, Still Worthy, supra note 114, at 1776. Nussbaum argues:

Reading Richard Posner's ['Problematics' article] is something like reading Hume's

Treatise with the Hume removed: like, that is, encountering the implausibly mechanistic

picture of human personality and the defiant debunking of reason's pretensions without

at the same time, and inseparably, encountering the gentle, playful, and many-colored

mind, thoroughly delighted by reason and human complexity, incomparably deft in ar-

gument, that again and again soars beyond and dives beneath the rigid structures it has

erected for itself.

Id. (footnotes omitted).

235. See generally Cotter, supra note 210, at 2130-35. In addressing the incommensurability

thesis, discussed supra note 167 and accompanying text, "the pragmatist is skeptical about any

proposal that sets up economic efficiency as the exclusive, or even predominant, criterion in-

forming a given area of the law .... To believe, as does Posner, that it would be an improvement

if all of law could be reduced to instrumental terms is to fall into yet another foundationalist

trap." Id.

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slumbers," that is, an unthinking acceptance of the role of reason. 236

In similar fashion, I will try to respond to Judge Posner's skepticism asKant did to Hume.

The first pages of The Critique of Pure Reason spell out the problemKant seeks to resolve. As Hume observes, all of our knowledge be-gins with experience. 237 But that it begins from experience does notnecessarily lead to the conclusion that all knowledge arises from expe-rience: "It is therefore a question which deserves at least closer inves-tigation, and cannot be disposed of at first sight, whether there exists aknowledge independent of experience, and even of all impressions ofthe senses?" 238

As discussed in Part II, Kant answered the question "yes," but withan explanation. The knowledge claims of reason are limited to thatwhich relates to experience, but reason may make a priori claims ofmorality. As we will see, it is the same reason. There is a unity in howour reason approaches both truth (as in scientific method) and moral-ity (as in concluding that reason is not a slave of the passions in help-ing decide what we ought to do). We need not ignore nor deridewhere our minds may take us, but instead may find an explanationbased in reason for the fact that we-skeptics, pragmatists, and ideal-ists alike-even perceive a sense we call contingency (much less thecontingency that might be addressed by a legal contract). In short, ourreason takes us to a place that is ideal, as we think the world ought tobe. The world does not necessarily follow. And that gap, between the"ought" of our reason-how things should turn out-and the "is" ofexperience-what really happens in the world-is how we define con-tingency.239 For the ploughman and the practical professor, I arguethat there is more practical value for the working deal lawyer in thisphilosophical understanding than the legal pragmatists give credit.

a. The Nature of Reason

First, we need to understand something about Kant's explanation ofthe workings of reason. Not being tied to any form of experience, inKant's view, our reason nevertheless organizes our perception of ex-perience.240 It does so through an innate drive to seek the Uncondi-

236. Immanuel Kant, Prolegomena to Any Future Metaphysics, in THE PHILOSOPHER'S HAND-BOOK, supra note 121, at 389.

237. See supra notes 134-145 and accompanying text.238. KAr, supra note 134, at 25.239. My discussion of Kant here and in the sections that follow is drawn from NEIMAN, supra

note 234.240. See id. at 61-62.

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tioned. When we begin to investigate nature, our reason, quite apartfrom any experience, simply assumes from the outset (a priori) thatthere are empirical laws governing what we see. Think about our ex-ploration into subatomic particles. We began with the ancient Greeksspeculating whether the elements were one or four. Now we are dis-covering the proton's parts-quarks and mesons, which are held to-gether by, forces-the weak force, the strong force, gravity, andelectromagnetism. We describe these forces by application of our rea-son to more and more data, spurred by reason telling us that we stilldo not have the final and unconditioned answer. As Susan Neimandescribes it:

A state of affairs is presented in appearance. Reason is thereuponmoved to ask for its conditions, that is, the premises upon which itappears in just this way at just this time. The regress thus prescribedis simply the attempt to explain the ordinary data of experience. Afull explanation cannot rest content with the statement of the condi-tions of the initial state of affairs that demanded it. These condi-tions, in turn, must be explained, and their conditions, until wereach a point at which no further explanation is conceivable. Thispoint, at which the given would appear as self-explanatory andhence necessary, is the Unconditioned. 241

All references to the Unconditioned are metaphors; a "horizon" wecan approach but never reach.242 "If the Unconditioned is the idea ofthe complete intelligibility of the world as a whole, it is equally theidea that the world as a whole forms a system according to laws." 243

Indeed, as discussed earlier, it forms the basis by which Judge Posnerwould see not only utility, but beauty, in the derived systematic lawsof science or economics. It is one thing to see the behavior of themarket; it fills us with satisfaction to be able to explain it elegantlywith four lines on a supply and demand graph.244

b. Reason and the Scientific Method

Kant claims that reason demands to systematize what we experi-ence, and these demands form the basis of science, with the followingimplications:

* We assume that nature as a whole forms a system according toempirical laws.

241. Id. at 63.

242. Id. at 64.

243. Id. at 65.

244. See supra note 230 and accompanying text.

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* We are able to go beyond present experience to possible experi-ence, and posit truth claims about the unseen (e.g., mesons andquarks).

" We are able to deduce methodological principles that guide theinquiry:

Reason's ability to do this stems from characteristics wehave already noted: its role as an autonomous power [in-dependent of experience] gives it the capacity to select theelements of experience that are to be considered as wellas, more generally, the capacity to formulate hypothesesthat are not simply abstractions of statements derivedfrom experience. 245

These principles taken together are the philosophical basis for themethod Judge Posner so admires-the offering of a hypothesis andthe subsequent measurement of its predictive power.

The ultimate irony is the ultimate paradox. Achieving knowledgeof the Unconditioned (consider, for example, the issue surroundingteaching Creationism in the schools) would be the end of science. Weseek knowledge with a drive that, if successful, would be the end ofknowledge seeking.

c. Reason and Morality

We have not, until now, discussed how Kant viewed the operationof reason in the realm of morality. Unlike scientific inquiry into na-ture, which seeks to know what is true, morality only requires that wedetermine what we ought to do.246

Kant approaches this by way of imperatives. An imperative is not aproposition claiming to be true or false, but claiming to say what weought to do.247 A hypothetical imperative is one that may be true inall states of the world: "Tell a man, for example, that he must be in-dustrious and thrifty in youth, in order that he may not want in oldage. ' 248 A hypothetical imperative does not state a moral law-it de-

245. NEIMAN, supra note 234, at 70-75.246. See Scruton, supra note 148, at 84. Scruton notes:

So conceived, the task of proving the objectivity of morality is less great than that ofproving the objectivity of science, despite popular prejudice to the contrary. For thefaculty of the understanding requires two "deductions", one to show what we mustbelieve, the other to show what is true. Practical reason, which makes no claims totruth, does not stand in need of this second "objective", deduction. It is enough thatreason compels us to think according to the categorical imperative. There is nothingfurther to be proved about an independent world.

Id.247. KANT, supra note 13, at 171-72.248. KANT, supra note 141, at 227.

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pends on the material and practical end being sought. If you want togo to a top law school, get good grades and score well on the LSAT.But you may not want to, in which case the imperative is not helpful.

In addition to the utilitarian hypothetical imperative, there is alsowhat Kant calls a categorical imperative. In contrast to a hypotheticalimperative, a categorical imperative strips away all empirical condi-tions.249 There is no "if" at the beginning. By practical reason, wederive the "ought" statement that should be binding not only on our-selves, but also on any rational person. It is the basis on which I mayuniversalize a rule from my particular wants and needs to a generalstatement. Make no mistake: I cannot demonstrate the validity of acategorical imperative through empirical testing. It is synthetic-thestatement is not simply true in itself-and a priori-it is derived solelyby my reason.250

There can be many categorical imperatives, but Kant focuses onthree. The first is so well-known that it is not just a categorical imper-ative, but is generally referred to as "the Categorical Imperative:" Actin a way that the principle of your action would be, by your will, a"Universal Law of Nature. 251

The second is to act so as to treat humanity, whether in my own selfor in another's, always as an end and never only as a means. As wemust respect the autonomous rational agent that is our own self, wemust treat others as autonomous beings and ends in themselves. AsKant emphasized, "Beings whose existence depends not on our willbut on nature's, have nevertheless, if they are irrational beings, only arelative value as means, and are therefore called things; rational be-ings, on the contrary, are called persons, because their very naturepoints them out as ends in themselves. 252

Finally, every rational being must act as if he or she were both asovereign and a member of a kingdom of ends.253 This recognizes thateach of us has a free and autonomous will that is sovereign for us, butwhich is required to see others, also having a free and autonomouswill, as ends. Yet, reciprocally, as to that other, we are the end con-templated by the other's sovereign will. We are thus obligated, evenwhile recognizing that the kingdom of ends is an unattainable ideal, toattempt to achieve it.254

249. KANT, supra note 13, at 172.250. SCRUTON, supra note 110, at 284-85.

251. KANT, supra note 13, at 179.252. Id. at 185-86.253. Id. at 190-91.254. Id.

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The same paradox of science appears in morality. Our reason iscapable of describing an ideal world-where the real and the rationalare the same, where the "is" and the "ought" coincide-but the worldhas a stubborn way of not measuring up. Nevertheless, our reasonseeks unconditioned and final truths about the linkage, for example,between virtue and happiness. 255 Reason demands that the worldmake sense, but experience is random. Reconciling the two, saysKant, is beyond our means.2 56 As Susan Neiman explains, not onlywould attainment of the Unconditioned in science end science, butknowledge of a systematic link between happiness and virtue, even ifpossible, would be morally disastrous.257 If we knew the formula thatconnects virtue and happiness, we would not be able (unless we weresaints) to act other than as utilitarians, and in that we would have nofree will. The essence of morality is choice, and there is no real choiceunless we do not know whether virtue will be rewarded. What makesus moral versus merely good or happy is that we have to choose andnot know the reward.25 8

d. Reason and Dogmatism

Finally, there is a linkage among reason, dogmatism, and skepti-cism. Contrary to the image often presented by the pragmatists,259 thenotion that we will never know for certain whether goodness is linkedto happiness is, paradoxically, humbling and pragmatic. 260 As SusanNeiman observes, "For Kant, human virtue requires a stance that isdemanding and complex: we must guide our actions by an idea of rea-son, yet any purported assurance that we have attained this idealwould be self-defeating. '" 261

Consider the following Kantian assessment of Judge Posner's "prag-matic skepticism" and his rejection of philosophy as the "mind on hol-

255. If you believe otherwise, and you are a person who regularly fastens your seat belt in thecar, think about your instinctive reaction when hearing about a random death that was not thevictim's fault, to find out whether she was wearing her seat belt.

256. Susan Neiman observes about Kant's philosophy: "The gap between nature and freedom,is and ought, conditions all human existence .... Integrity requires affirming the dissonance andconflict at the heart of experience." NEIMAN, supra note 1, at 80.

257. NEIMAN, supra note 234, at 129-31.

258. NEIMAN, supra note 1, at 67-72.

259. POSNER, supra note 14, at 6 (stating that "[tihe consequences that concern the pragmatistare actual consequences, not the hypothetical ones that figure prominently in Kant's moraltheory").

260. NEIMAN, supra note 234, at 132.

261. Id. at 131.

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iday. ' 262 Susan Neiman summarizes the Kantian view of the urge tophilosophy as follows:

Human reason is driven to seek the Unconditioned, the thorough-going intelligibility of the world as a whole. Coming of age requiresnot abandoning, but redirecting this search: from dogmatic meta-physics to empirical science, from a theodicy that affirms the socialorder to a political program that transforms it.263

Kant recognized the urge of unrestrained metaphysical meandering asthe road to a dogmatic creed, deceived in its belief that it alone hadreached the Unconditioned, but wholly or partially untethered toexperience.

But the postmodern skeptic (like Richard Rorty, whom Judge Pos-ner hails as a philosophical pragmatist one can understand) 264 fares nobetter than the dogmatic absolutist, and Neiman's explanation is wor-thy of quoting in its entirety:

[Kant's] conception of philosophy is fundamentally different frompostmodern calls for an end to metaphysics because it is regulative,frankly directed toward the achievement of enlightenment. TheKantian answer to those who find its justification of that goal unac-ceptably self-supporting is available in the [Critique of Pure Rea-son]. Those who assume that if philosophy failed to provide us withcertain knowledge, it can, at best, become an instrument of play ac-cept the traditional assumption that only constitutive claims ensuregenuine reality. Their rejection of metaphysics is merely the disap-pointed mirror image of metaphysics itself. This is, I believe, themeaning of Kant's claim that skepticism is simply counterdogmat-

- ism [ ]. The skeptic uncritically shares the dogmatist's beliefs aboutthe nature of reason and reality. His rejection of reason and philos-ophy is based on their failure to succeed in terms of an unexaminedand untenable model. Hence, their attitude toward the hope of en-lightenment that underlies every attempt at philosophy is as dog-matic as that of those who sought to fulfill that hope by constructingsystematic metaphysics. 265

Professor Charles Fried may have expressed the same thought infewer words in his response to Judge Posner's Problematics: "As sooften happens, the skeptic here is a disappointed absolutist, taking hisrevenge on the world for depriving him of all the right answers all atonce. ", 2 66

262. POSNER, supra note 14, at 5.

263. NEIMAN, supra note 234, at 202.

264. POSNER, supra note 14, at 39-48.

265. NEIMAN, supra note 234, at 202 (footnote omitted).

266. Fried, supra note 229, at 1750.

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C. Normative Recommendations

As we turn to-normative proposals about dealing with contingencyin complex business transactions, I am concerned I may be co-optedby the need to present an argument of utility. I should be advocatingthat those who agree with me, or leaders who act on the principles Iadvocate will be more successful, set better policy, maximize socialwelfare, and bring greater job satisfaction to their employees and ahigher return to shareholders. But the nature of my Kantian belief incontingency says there are no guarantees of that-and so we find our-selves in a paradox.

What is the philosopher-deal lawyer to do? Give up trying to pro-duce results in the real world and engage only in speculative musings?Or conclude that the only way he or she can make a difference is to bea utilitarian? I will offer both hypothetical (i.e., instrumental) and cat-egorical (i.e., universal and unconditional) imperatives. As to the for-mer, I will consider the prominent place of something more thanpragmatism-indeed, a Kantian limited idealism-in that most instru-mental of arenas, business management and leadership (with someslightly non-utilitarian speculation about why there exists such a Sig-nificant divide between legal and business theorists on the subject ofphilosophy). As to the latter, I will draw on some examples where Ibelieve a less economic and more philosophical approach for lawyerswould be better, both for results and in itself.

1. Idealism in Modern Management Theory

The legal approaches to contingency we reviewed in Part II, despitethe attempts to bring other disciplines to bear, are largely ex post anddirected to legislators or judges. The modern literature of contingencyfor business leaders is far more robust.267 The literature incorporatestwo fundamental learnings from philosophy. First, there is a persis-tent call in leadership to what can only be described as idealistic, tran-scendental, or spiritual values. 268 Second, true to the Kantianparadox, if those that are led believed that such appeals were whollyutilitarian, they would not work.2 69 Hence, business executives create

267. I speculate that two reasons explain this. First, there is the philosophically analytic:Leadership is inherent in the concept "business leader." Nobody expects a lawyer to be a leader.Hence, leadership is generally not part of the formal or continuing legal curriculum. Second, Isuspect that newly minted MBAs (I will give a pass to the organizational design specialists) areas likely as newly minted lawyers or legal economists to be overwhelmed by the sheer magic oftheir scientific skills (e.g., valuation techniques), if not the power of profit as motivation to all ofthe employees of the firm.

268. See infra notes 281-298 and accompanying text.269. See infra notes 278-280.

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value by an appeal to an "ought" whose realization in the world wouldnecessarily bring an end to the impulse for creation of value.

a. The Management-Leadership Revolution

The business literature stems from a revolution in the philosophiesof managing and leading business organizations over the second halfof the twentieth century, very little of which appears to have surfacedin the scholarly literature of the law, or in practical manuals for work-ing lawyers. A classic study in modern business literature, The Ma-chine That Changed the World,270 recounts the history of thisrevolution and its impact. After World War II, Japanese industry de-veloped production methods, particularly in what came to be knownas the Toyota Production System, to address Japan's global noncom-petitiveness. 271 This newer philosophy of "lean production" and the"lean enterprise" had a decidedly utilitarian outcome: It made massproduction systems and organizational designs developed by HenryFord and Alfred Sloan in the first half of the century obsolete. 272 Bythe late 1980s, that obsolescence was a significant contributor to theactual and perceived decline of American industrial leadership. 273 It

triggered a massive American response-the management and pro-ductivity revolution of the 1990s (and not coincidentally, the decade-long boom economy). 274 The irony is that, in substantial part, thisrevolution of management and leadership had to be something morethan utilitarian to succeed.

Compare the Toyota system to the systems Ford and Sloan devel-oped. On the factory floor, "Ford not only perfected the interchange-able part, he perfected the interchangeable worker. '275 At GeneralMotors, Alfred Sloan, an MIT graduate, applied the same principlesto the organization and management of the enterprise itself; he"would make the system Ford had pioneered complete, and it is thiscomplete system to which the term mass production applies today. 276

270. See generally JAMES P. WOMACK ET AL., THE MACHINE THAT CHANGED THE WORLD

(1990).

271. See id. at 48-51.

272. Id. at 44-47.

273. In his 1985 look back at his work on noncontractual norms, Stewart Macaulay referred towhat was legitimately perceived at the time as "[tlhe decline of the American industrial econ-omy." Macaulay, Empirical View, supra note 5, at 472.

274. See generally PAUL INGRASSIA & JOSEPH B. WHITE, COMEBACK: THE FALL AND RISE OF

THE AMERICAN AUTOMOBILE INDUSTRY (1995).

275. WOMACK ET AL., supra note 270, at 30.

276. Id. at 40.

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James Champy, one of the leading exponents of business reengineer-ing, describes the philosophy:

"A great business," said Henry Ford, who knew one when he sawone, "is really too big to be human." The pronouncement, whichmany people would agree with, begs an interesting question: If agreat business can't be human, what can it be? Some image, or met-aphor, is called for .... And there's not much question what wordFord would have chosen to describe his "great business." He wouldhave called it a machine.

... Through Sloan, the... ideas went well beyond the mechaniza-tion of human labor, to the mechanization of management. Sloanimagined, and in fact realized, a management machine, a way tobuild not just cars, but an entire company. 277

Now the buzzwords of the lean production revolution are part ofthe vernacular, and not just in business: empowerment, manufacturingteams and cells, kai-zen (continuous improvement), and kan-ban (just-in-time inventory management). 278 The human impact of lean pro-duction on the factory floor, for example, illustrates the change.There are two essential aspects to a manufacturing team: (1) "workersactually adding value" to the product (those on the line) take on "themaximum number of tasks and responsibilities"; and (2) "a system fordetecting defects" and quickly discovering their ultimate (not immedi-ately proximate) cause.279 The paradox of ideals and utility in the im-plementation of lean production is apparent:

Our studies of plants trying to adopt lean production reveal thatworkers respond only when there exists some sense of reciprocalobligation, a sense that management actually values skilled workers,will make sacrifices to retain them, and is willing to delegate respon-sibilities to the team. Merely changing the organization chart toshow "teams" and introducing quality circles to find ways to im-prove production processes are unlikely to make muchdifference. 280

In short, mere practice is insufficient; if the utilitarian aim is transpar-ent, the technique does not work.

b. Idealism and the New Leadership

The effect of the management-leadership revolution on resusci-tating idealism as a means of addressing business contingency is ap-parent even from the most cursory review of contemporary

277. JAMES CHAMPY, REENGINEERING MANAGEMENT 11-13 (1995).278. WOMACK ET AL., supra note 270, at 62, 149.279. Id. at 99.280. Id.

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management literature.28' Professor John Kotter of the Harvard Busi-ness School is one of the most influential leadership theorists, and hisexposition of the differences between management and leadership is aclassic in the literature. 282 It is also consistent with the description ofhow the business world has changed in the past fifty years.

Kotter sets forth the three primary functions of managers: planningand budgeting, organizing and staffing, and controlling and problem-solving. But he distinguishes management from leadership, highlight-

ing the particular role leadership (as opposed to management) playsin dealing with contingency:

Management is about coping with complexity. Its practices and pro-cedures are largely a response to one of the most significant devel-opments of the twentieth century: the emergence of largeorganizations. Without good management, complex enterprisestend to become chaotic in ways that threaten their very existence.Good management brings a degree of order and consistency to keydimensions like the quality and profitability of products.

Leadership, by contrast, is about coping with change. ... Morechange always demands more leadership.283

The respective leadership analogues of managerial skill consist ofthe following: (1) setting a direction; (2) aligning people; and (3) moti-vating and inspiring. 284 Note the perception of an idealistic compo-nent to the last element, in particular:

Motivation and inspiration energize people, not by pushing them inthe right direction as control mechanisms do but by satisfying basichuman needs for achievement, a sense of belonging, recognition,self-esteem, a feeling of control over one's life, and the ability tolive up to one's ideals. Such feelings touch us deeply and elicit apowerful response. 285

The question answers itself: Is this empirical observation better sup-ported by a philosophy of dogmatic skepticism (leading to the conclu-

281. What follows is an unscientific sampling based on a representative selection from the

management tomes presently sitting on my bookshelf, collected between the end of 1992 and

mid-2004. In addition to those cited in the text, the following works are also instructive in seeing

a role for philosophy in leadership that addresses contingency: THE PRICE WATERHOUSE

CHANGE INTEGRATION TEAM, THE PARADOX PRINCIPLES (1996) (referring, inter alia, to Soren

Kierkegaard, Oscar Wilde, and Alfred North Whitehead on the role of paradox in the manage-

ment of chaos, complexity, and contradiction); Joseph L. Badaracco, Jr., The Discipline of Build-

ing Character, HARV. Bus. REV. ON LEADERSHIP, Mar.-Apr. 1998, at 115 (quoting William

James regarding the utility of ideas); Nitin Nohria & James D. Berkley, Whatever Happened to

the Take-Charge Manager, HARV. Bus. REV. ON LEADERSHIP, Jan.-Feb. 1994, at 128 (calling on

managers to return to the pragmatism advocated by 19th century American pragmatists).

282. See JOHN P. KOTrER, JOHN P. KOTTER ON WHAT LEADERS REALLY Do 37-60 (1999).

283. Id. at 52-53.284. Id. at 54-62.285. Id. at 60.

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sion that we should approach people solely as rational actorsmaximizing gains) or some kind of pragmatic idealism, grounded inthe notion of others as subjects, not objects, and the achievement of a"kingdom of ends"?

Professor Peter Senge, whose principles are laid out in The FifthDiscipline, is perhaps the leading proponent of business as a "learningorganization. ' 286 His work is both a theoretical exposition of humanmotivation and a practical manual for its use in the workplace.287

Without detailing the rubrics under which Senge organizes the princi-ples of a learning organization, 288 consider the philosophical nature ofSenge's take on the contingency of the world:

From a very early age, we are taught to break apart problems, tofragment the world. This apparently makes complex tasks and sub-jects more manageable, but we pay a hidden, enormous price. Wecan no longer see the consequences of our actions; we lose our in-trinsic sense of connection to a larger whole. When we then try to"see the big picture," we try to reassemble the fragments in ourminds, to list and organize all the pieces. But, as physicist DavidBohm says, the task is futile-similar to trying to reassemble thefragments of a broken mirror to see a true reflection. Thus, after awhile we give up trying to see the whole altogether.

The tools and ideas presented in this book are for destroying theillusion that the world is created of separate, unrelated forces.When we give up this illusion-we can then build "learning organi-zations," organizations where people continually expand their ca-pacity to create the results they truly desire, where new andexpansive patterns of thinking are nurtured, where collective aspira-tion is set free, and where people are continually learning how tolearn together.289

286. See generally PETER M. SENGE, THE FIFrH DISCIPLINE: THE ART AND PRACrICE OF THELEARNING ORGANIZATION (1994).

287. Indeed, The Fifth Discipline generated a separate manual of case studies and practiceguides. See PETER SENGE ET AL, THE FIFTH DISCIPLINE FIELDBOOK: STRATEGIES AND TOOLS

FOR BUILDING A LEARNING ORGANIZATION (1994).288. They are, briefly: "personal mastery" (developing our own abilities to bridge the gap

between the current reality and the reality we would like to create); "mental models" (our"deeply ingrained assumptions" and generalizations that impact how we order the world of ex-perience); "building shared vision" (how individual visions of the future can be shared by anentire organization); "team learning" (how we go about tapping all of the intelligence with ateam); and "systems thinking" (understanding that the world works in archetype systems that areoften beyond our control to influence). SENGE, supra note 286, at 5-16. The Kantian aspects ofthis philosophy are probably apparent from the foregoing parentheticals; I leave further explica-tion for another time.

289. Id. at 3. In a 1994 article in Fortune magazine, Senge described himself as an "idealisticpragmatist." Brian Dumaine, Mr. Learning Organization, FORTUNE, Oct. 17, 1994, at 147. Hiswork developed a significant following in corporate America, but also raised some concerns thathe was leading a New Age cult:

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But the learning Senge has in mind is, again, more than merelypragmatic or utilitarian: "[I]t is not enough merely to survive. 'Sur-

vival learning' or what is more often termed 'adaptive learning' is im-

portant-indeed it is necessary. But for a learning organization,'adaptive learning' must be joined by 'generative learning,' learning

that enhances our capacity to create." 290 Adaptive learning has to do

with the "is" of current reality and the contingent future. Generative

or leadership learning has to do with the "ought" of an ideal world-

one without contingency.

Finally, in Senge's conception of our own growth (what he calls per-

sonal mastery), he cites a poll pointing to "a 'basic shift in attitude of

the workplace' from an 'instrumental' to a 'sacred' view of work. 291

Senge observes:The instrumental view implies that we work in order to earn theincome to do what we really want when we are not working. This isthe classic consumer orientation toward work-work is an instru-ment for generating income. Yankelovitch uses the word "sacred"in the sociological not religious sense: "People or objects are sacredin the sociological sense when, apart from what instrumental usethey serve, they are valued for themselves. '" 292

This is almost a restatement of Kant's notion of free will and auton-

omy of the self-the dualism between the empirical world of physical

cause and effect and the domain of reason-where the essence of mo-

rality is reasoned choice. We work because it is the moral thing to do.

With Michael Hammer, James Champy advocated a business

change model called "reengineering": Drastic reshaping of businessprocesses that threw out theories of organizing work (e.g., the division

of labor, elaborate controls, the need for managerial hierarchy) dating

back to the dawn of the Industrial Revolution.293 Two years later,Champy revisited the subject, asking why reengineering had not

worked in many cases.294 Champy noted the difficulty with which

managers let go of the image of factory and organization as machine:

Senge fears that being tarred with the New Age label will hurt the careers of those

pioneering managers trying to spread the learning organization within their traditional

corporations. But maybe Senge worries too much. Says Ford's [Fred Simon, a senior

platform manager], a big Senge fan: "Anybody who comes into my office doing a folk

dance is fired."Id.

290. Id. at 14.291. Id. at 144.

292. Id.

293. See generally MICHAEL HAMMER & JAMES CHAMPY, REENGINEERING THE CORPORA-

TION: A MANIFESTO FOR BUSINESS REVOLUTION (1993).

294. See generally CHAMPY, supra note 277.

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Don't dismiss this notion [of the machine] too fast. It had, and con-tinues to have, tremendous appeal to all of us. Why? Because it isan ideal, a vision of perfected human activity. Human beings arejust fine; we wouldn't be anything else. But we are undependable:We get distracted, tired, angry, lusty, and ornery. We get depressed,we're drawn this way and that, grumbling about doing what's goodfor us. We scheme and battle. Organizational machines, or so themetaphor wants us to believe, do not suffer from any of thesedisabilities. 295

What reengineering requires, says Champy, is more than letting goof command-and-control. 296 It requires abandonment of faith in aneternal, universally right way of doing things (or the illusion of oneconclusive solution to any business problem), but retention of faith inhuman beings: "the knowledge and belief that we are all eager tolearn, and capable of dedication, high spirits, and individual responsi-bility. '2 97 Finally, Champy observes what we have previously de-scribed as the Kantian paradox:

"At the end of every day of every year, two things remain unshak-able," Roberto C. Goizueta, chairman and CEO of Coca-Cola Co.,says. "Our constancy of purpose and our continuous discontentwith the immediate present."

Note the contradiction, the inconsistency, the zig and the zag be-tween constancy and discontent. No hobgoblins, no corpses holdback this company .... Somebody once said that the best sign ofintelligence is the ability to hold two good, but contradictory ideasin one's head at the same time. More is required of managementtoday than intelligence. Character is required, and the best sign ofit-the reengineering character anyway-is not only to hold twogood, contradictory ideas, but to act on them.2 98

How do we explain this significant gap between, on one hand, thecontingency philosophies inherent in legal scholarship, where the pre-vailing views range from moderate pragmatism to radical skepticismand, on the other hand, philosophies of contingency inherent in mod-ern management theory that range from a moderate pragmatism toKantian dualism to a significant dose of idealism? I suggest the an-swer lies in a thought expressed above. Legal scholars have difficultyescaping the multiple bonds of the legal model, the new orthodoxiesof economic analysis, and the prevailing hindsight view that is peculiarto judges and to the way we teach the law by the reading of litigatedcases. Because lawyers play on business turf in the creation of deals,and business people play on legal turf in the later litigation, theory

295. Id. at 13.296. Id. at 29.297. Id. at 26-27.298. Id. at 38. Cf. Lipshaw, supra note 3.

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about ex ante creation versus ex post interpretation is largely relegatedto business thinkers.

2. Idealistic, Pragmatic, and Creative Lawyers

The lesson of business leadership theory is that there is a place for

idealism in the empirical and instrumental world. Great business

leaders envision a world as they want it to be (ideal-as it ought to be)

but are not consumed by the fact that things do not always work out

as they should. They understand and adapt to contingency, but not as

skeptics or even pragmatic skeptics.299

Moral philosophy offers practicing lawyers several categorical im-

peratives. Our reason is capable of letting us see how to bridge the

"is" and "ought"-to see the ends of a deal as well as the means to get

it done. One of the deans of the academics of entrepreneurship, Wil-

liam Sahlman, has also aptly described a kind of pragmatic idealism

that is distinct from reliance on legal or economic models.300 Sahlman

disdains entrepreneurs and investors smitten by valuation methodolo-

gies and deal terms, noting that entrepreneurs naively seek passiveinvestors, like doctors and dentists, rather than sophisticated venture

capitalists who demand control and a larger share of the returns.30 1

Sahlman observes, "New ventures are inherently risky, as I've noted;

what can go wrong will. When that happens, unsophisticated investors

panic, get angry, and often refuse to advance the company more

money. Sophisticated investors, by contrast, roll up their sleeves and

help the company solve its problems. ' 30 2 Moreover, the optimum ap-

proach to contingency is not found in complex ex ante contracting:Often, deal makers get very creative, crafting all sorts of payoff andoption schemes. That usually backfires. My experience has provenagain and again that sensible deals have the following sixcharacteristics:

" They are simple." They are fair.* They emphasize trust rather than legal ties.* They do not blow apart if actual differs slightly from plan.• They do not provide perverse incentives that will cause one

or both parties to behave destructively.

299. Pragmatism is simultaneously criticized and defended, and both views are consistent with

the idea that pragmatism simply refuses to recognize the role of our reason in driving us to the"ought" of the ideal world. The criticism is that pragmatism privileges the status quo and the

prevailing political ideologies. The defense is that pragmatism provides a philosophical basis for

gradual and incremental changes. Cotter, supra note 210, at 2073 nn.9-10.

300. William A. Sahlman, How to Write a Great Business Plan, HARV. Bus. REV. ON LEADER-

SHIP, July-Aug. 1997, at 98.301. Id. at 107.302. Id.

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* They are written on a pile of papers no greater than one-quarter inch thick.303

When a practicing deal lawyer sees more than the model of the lawor the rational actor, he or she becomes a participant in the creationof value. In Silicon Valley, successful venture capital lawyers havemanaged to discard that "inflated 'rights consciousness' that disruptsmore flexible and consensual extralegal relationships. '' 304 They ab-sorb uncertainty by being creative in their fee structures305 and theirapproach to opinion letters.306 By the clients they take on and en-courage, these lawyers help determine which entrepreneurs obtain fi-nancing.30 7 They often serve as the first business advisor theentrepreneur has ever had.30 8 They create market standards for dealterms.309 Effective M&A lawyers engage in the "creative discovery ofcommon ground. '310 They act as wise counterweights to their clients,offering "persistence" toward the goal when necessary and "perspec-tive" when appropriate. 311

What we accomplish by means of our reason in crafting deal solu-tions is our handiwork. In her article on the process by which judgesmake decisions, Linda Ross Meyer has defended practical reason,challenging postmodern and pragmatic rejection of all theory, and shebuilds a bridge from philosophy to practice.312 Her use of Heidegger'sexplanation of thinking is one of the only allusions to the process of expost legal interpretation I find to be equally applicable to ex antedealmaking. Heidegger compared thinking to handiwork to make thepoint that there is a fundamental relationship between thinking andthe physical world that is prior to, in Kantian terms, pure or practicalreason: "If he is to become a true cabinetmaker, he makes himself an-

303. Id.304. Suchman & Cahil, supra note 201, at 680 (footnote omitted).305. Id. at 691-94.306. Id. at 694-97.307. Id. at 698-99.308. Id. at 699-702.309. Id. at 702-03.310. FREUND, supra note 12, at 18-21.311. Id. at 25-26. See PETZINGER, supra note 168, at 186-87 (describing how Arthur Liman

summoned the courage to act as a counterweight to Hugh Liedtke's rage in the midst of theGetty/Pennzoil negotiation). Petzinger writes:

Liman did not relish calling across the street to the Waldorf and telling his client that hecouldn't even get the new proposal inside the four walls of the boardroom. Even to ahigh-powered lawyer like Liman, "Chairman Mao" was an intimidating figure. ButLiman dialed the phone anyway and got Liedtke up from the lunch table. Liedtke letloose a chain of expletives.

In the face of the tirade, Liman drew his breath.Id.

312. See generally Linda Ross Meyer, Is Practical Reason Mindless?, 86 GEO. L.J. 647 (1998).

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swer and respond above all to the different kinds of wood and to theshapes slumbering within wood. ' 313 Meyer transposes the allusion ofcabinetmaking as practice to thinking as practice:

Practice is significant and meaningful; the "working relations" be-tween persons and persons, and between persons and things, givemeaning. Practice allows things to be "as" something else, allowsfor "like" cases and "relevant" precedents, signs, and symbols.Hence practice, thought of as the relations we see in our experienceof working in the world, is significant, because significance is thetracing of connections. These connections make possible what wedo-they are the shapes slumbering in the wood, the potential tentin the blanket, the music that a vibrating string in a mathematic andartistic tradition makes possible. The possibilities that we see whenwe make cabinets and when we judge cases are given to us from thepast, not made by us. They are not just morally neutral or pre-moral possibilities waiting for us to price and evaluate them, butthey are already-directed ways which form and inform any abstractdiscussion of ethical theory.314

Part of my practice is counseling naive entrepreneurs about a dilu-tion structure that will cause them to get, percentage-wise, a smallerpiece of a growing pie, but one that grows in absolute size. Anotherpart is hearing my client in a deal negotiation propose a solution thatis far too broad for the problem and hearing the other side do thesame in response. In each case, the possibilities I bring to the tableare the shapes I see slumbering in the wood-out of the dreams andexpressions of my clients and others, I craft the cabinet of a deal.

Meyer's own normative recommendations about the marriage oftheory to practice (directed largely to judging) are echoed in Freund'scomments about practice: It "often boils down simply to a matter of'feel,' based on experience-as to where, for example, a particular linecan and should be drawn, to compromise opposing viewpoints whileadequately protecting each of the parties. '315 The "technological col-onization" of the law is unlikely to help us understand or teach "feel;"but the study of theory, in this case, philosophy, can "point out impor-tant legal concepts left behind... [and] the consequences of[ ] techno-logical thinking. '316

Our reason is capable of turning us into dogmatists, in our lives gen-erally or in a conference room specifically. The same gift-the drive

313. Id. at 654-55 (quoting MARTIN HEIDEGGER, WHAT IS CALLED THINKING 14 (Fred D.Wieck & J. Glenn Gray trans., 1968)).

314. Id. at 656.315. See FREUND, supra note 12, at 2.

316. Meyer, supra note 312, at 673-74. Expressed in far less technical terms, we are awash ininformation. That is one degree removed from knowledge, and still another from wisdom.

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to find the Unconditioned-that makes us look for universal laws ofnature and morality contains a curse if we give it too much credit.When faced with paradoxical choices between competing and mutu-ally exclusive values (individual or team, data or intuition, doing it fastor doing it right, justice or mercy), we have three alternatives. We candrive to one pole or the other, or, as writer F. Scott Fitzgerald sug-gested, hold both opposing views in the head at the same time and stillmaintain our ability to function. 317 Of the three, the third is the mostdifficult to adopt as a day-to-day operating philosophy, precisely be-cause reason itself rebels against it and continues to seek the Uncondi-tioned. Theodicy explains or justifies evil, and, even in the thirdmillennium, the phrase "God's will" continues to be comforting andmeaningful to saints and sinners. For most of the Western intellectualclass, however, theodicy went out over two hundred years ago, leavingus with only two alternatives: Wake up each morning to face the dayholding two opposing views in mind or divide the world into the forceof good (usually us) and the independent world of evil (usually them).You may not be any happier or more comforted in the latter case, butat least you will be right.318

The same dogmatism haunts the negotiating table, and regularlyshows itself in the rigidity or obstinacy of both lawyers and clients.Deal-killing occurs when we need to be right, regardless of the practi-cal risk or the present consequence. Pragmatism leaves us flexibleenough to avoid the problem, but idealism is the energy behind crea-tivity. Pragmatic skepticism is wonderful for hindsight and nit-pick-ing, but hardly the stuff of moving forward. 319

317. Quotation Details, The Quotations Page, at http://www.quotationspage.com/quote/90.html (last visited Apr. 4, 2005).

318. This is my thesis for the current state of electoral politics. It is difficult to sit in themiddle of the road anymore, holding perhaps but not exclusively the following melange of view-points: hates the idea of an abortion but supports the right to choose; supports gay civil unionsbut not marriage after long internal debate about what is "normative"; believes we were right totake out Saddam Hussein but wishes we had brought Europe back into the fold when we weredone; loves Starbucks but drives a hybrid gas-electric car; cringes at the idea of organized prayerin schools or the crhche on the city hall steps but has a deep and abiding faith; and, while he isthrilled with neither, doesn't understand why the left hates the very person of George W. Bushany more than why the right hated the very person of Hillary Clinton. Ironically, I suspect thatJudge Posner would agree with my foolish inconsistency, but insist that only his brand of pragma-tism protects against this dark side of reason. I prefer to continue my struggle with the "is" andthe "ought", even if I know there is no resolution to be had.

319. See France, supra note 12, at 88-90, on the common prejudice in the business world thatlawyers make bad corporate leaders:

Often unschooled in accounting or finance, lawyers start their careers in a strangeworld where risk is frowned upon, colorful marketing is unethical, people rarely workin big teams, and nobody makes a decision without reviewing stacks of paperwork first.

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We should undertake a moral approach to our involvement in thedealmaking process-to see each other as subjects and not objects-and do so because it is worthy in itself, and not because it is guaran-teed or even more likely to produce utility. Relevant here is the bril-liant and moral work of Jonathan Cohen on the varied forms ofrationality in negotiation, 320 and negotiating with respect.321 As to thelatter, he persuasively argues the a priori thesis that there is a generalmoral duty to respect other people-a duty that is not overridden bythe fact of negotiation or the various justifications that people mightfind in the course of negotiations for not treating others with re-spect. 322 His thesis-that we are morally obliged to see each other assubjects and ends, not as objects and means-is, as he recognizes, fun-damentally Kantian.323 How might this surface in practice? I offertwo hypothetical situations.324

Situation 1: A lawyer represents a company in the automotiveaftermarket manufacturing and distribution business. The companymakes and sells spark plugs and filters under some well-known brandnames. In Mexico, there is a filter company with which it is negotiat-ing a distribution joint venture. After six months of tough negotiatingand on the eve of signing a contract (without any indicia of a deal asthere was in the Getty/Pennzoil negotiation), the businessperson incharge of the deal says to the lawyer, "We have just come up with analternative joint venture partner, and, now that we think about it, it'sreally a better deal. Is there any reason why we can't do it?" Thelegal model has an easy answer: There is no reason not to go with thesecond deal. The answer of the rational actor/economic model ismore difficult to determine: It depends whether the theorist can reallyconstruct an economic model incorporating all the state contingenciesof behavior that we may characterize as legal yet opportunistic. Both

Risk aversion can be another problem. People who go to law school rather than B-

school tend to be more cautious. After all, they're choosing a career that holds out the

prospect of a guaranteed good income - rather than a small chance of a spectacular

one. What's more, the main goal of business lawyers is not to maximize profits but tominimize danger. "Good CEOs have to be able to make tough, bold decisions in the

face of uncertainty - and that's hard for lawyers," says James C. Gaither, a formercorporate attorney who is managing director at the Silicon Valley firm Sutter Hill Ven-

tures. "Lawyers want to keep working until they find the perfect answer."Id.

320. See generally Jonathan R. Cohen, Reasoning Along Different Lines: Some Varied Roles of

Rationality in Negotiation and Conflict Resolution, 3 HARV. NEGOTIATION L. REV. 111 (1998).

321. See generally Cohen, supra note 57.322. See id. at 750-51.323. Id. at 751 n.26. Cohen does not suggest, however, that Kantian philosophy is the only

way to arrive at the conclusion that we are morally obliged to respect others.324. Both of these situations are derived from transactions in which I participated.

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are valid ways to approach the issue, but there is a third approach, andit involves seeing the other party as subject and end, and not merelyobject and means. So the lawyer says, "There really isn't a legal claimfrom potential partner 1, but that's a minimal standard in any case.Whether or not you have actually signed the contract, is this an area inwhich you can afford to act opportunistically? And is your calculationbased on a good utilitarian model? Partner 1 will be angry. Have youreally thought through whether the benefit received from Partner 2will exceed the pain of extracting yourself from Partner 1? But mostimportantly, is that how you want to do business? What do you thinkthe right thing to do is? How would you react if the situation werereversed? And how does that factor into your analysis?"

Situation 2: You are the in-house lawyer for a diversified multina-tional company. The company (Seller) has signed a definitive agree-ment to sell its micro-widget division for one billion dollars to arelatively new, growing player in the widget industry (Buyer). Youand your business colleagues at Seller know that Buyer's executiveshave been scraping together financing in about the same way youscrounge around the house for money when it is time to pay the baby-sitter late on a Saturday night and you are out of cash.

One provision of the post-signing covenants in the definitive agree-ment says Seller may factor the division's accounts receivable until theclosing. In practice, what this means is that Seller sells the accountsreceivable to a bank (a factor) for a small discount, and takes the cashout of the business. Under the framework of the agreement, it allshould work out in the wash, because the post-closing adjustment,which compares the net assets of the division as of the closing with abase line net asset figure, should account for it. Hence, if Seller fac-tors $50 million in receivables, it will owe the Buyer that $50 million(plus interest) in about six months when the parties resolve all thepost-closing adjustment claims.

The only problem is, unbeknownst to Seller, the Buyer's financing isconditioned on the accounts receivable being there to help finance thebusiness over those intervening six months, and because of what Sellerdid (perfectly permissible under the contract), $50 million will bemissing from the business. The Buyer will be in breach of loan cove-nants from the day it first owns the business, and perhaps even insol-vent in the equity sense (unable to pay bills as they come due).

The Buyer is not particularly deal-savvy. Its lawyers and financepeople did not pick up the issue in the contract. Its treasurer did notreact a week prior when Seller's treasurer said he was going to factorthe receivables. Now, at the closing on a Friday afternoon, only an

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hour before the federal wire for the transfer of inter-bank funds shutsdown, Buyer's CEO and CFO tell you they cannot close unless Selleragrees to put $50 million dollars cash back in the business. Buyer hasno contractual right to make that demand, and the contract providesfor an unsecured $150 million in liquidated damages if the Buyer doesnot close by the end of business that afternoon. You can see the sweatdripping off the Buyer's CEO and CFO. They tell you either to putthe money back into the business or to sue us for the $150 million.Your own CFO is on the other end of a phone line, railing on and onabout how stupid the Buyer is, and how he, the CFO, had a legal rightto factor the receivables.

What do you do? Apply the legal model? A legal rationalist, en-amored of the state contingencies anticipated in the contract, regard-less of what the world turned out empirically to be, might well turn tothe remedies anticipated by the contract. Apply an economic model?I suspect even the brightest economist will not be able to computethat many moves and consequences that quickly. Apply the categori-cal imperative? Maybe there is some intuitive sense of how onewould act in this situation if one could will what any person wouldwant the universal rule to be-that is, if the positions were reversed.

I submit that there is no scientific or social scientific model thatprovides answers in either of these situations. The solutions lie in cre-ativity, vision, and leadership that are beyond mere pragmatic skepti-cism and economic models.

IV. CONCLUSION

My claim about the positive role of philosophy in explaining behav-ior and setting norms should not be overstated. I do not claim that

there are no ex ante concerns about ex post judicial interpretation. Tothe contrary, good deal lawyers think not only about the document,but also about the drafting history. For example, if my redraft sug-gests a clarification of ambiguous language, and you reject it, am Iworse off than before? That is, would a court consider that fact to bemy acknowledgment that your interpretation is correct if what we re-ally want to do is agree to disagree? I am only suggesting that philos-ophy has something to say about creativity and leadership in theinterpersonal process of closing very complex matters-here, thetransfer of, or creation of, businesses.

This Article has not addressed an important issue which deservesfurther thought. I do not address issues of the morality of the transac-tions themselves, or the conditions that have necessitated them. As-sume the following hypothetical. I am brought in as the CEO of a

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company, the demand for whose product (i.e., buggy whips, main-frame computers, or VCRs) has diminished almost overnight becauseof the rapid appearance of a superior substitute. I determine thatthere is no option but to write off some assets and sell others. Theconsequence will be that 2,000 people will be laid off, but for 8,000others, the business and their jobs have a chance to survive. I do notdiscuss here the moral implications of the decision to do So. 3 2 5

In this Article I have argued that the narrow confines of the lawrelating to commercial contingency and the strictures of the law andeconomics model that dominate contract theory are insufficient to ex-plain contingency in complex transactions or to guide lawyers in deal-ing with it. Practicing deal lawyers would be well served by looking tophilosophy, particularly Kant's views on the uses and limits of reason,in addition to welfare economics and game theory for cross-discipli-nary normative proscriptions. Finally, I have suggested that lawyerswho are legal or economic dogmatists, seeing the world only as theywant it to be, or who are only pragmatic or empirical, and acknowl-edge only the world as it is, will be far less effective in the highlycontingent environment where contracts create more moral than legalmarkers. The most effective real world deal lawyers will be preparedto address contingency and counsel their clients pragmatically, butwith far more idealism than current proponents of the jurisprudenceof either legal pragmatism or "pragmatic moral skepticism" haveacknowledged.

325. I have a tentative thesis, but it is a work in progress. In short, I am willing to concede thesimultaneous operation of economic laws and moral laws. They are, respectively, the embodi-ments of the critical distinction in Kant between the nature of instrumentality and the nature offree will or autonomy. Our needs in everyday life are fulfilled by instrumental relationships allthe time. Discernable physical and economic laws govern the satisfaction of what Kant calls ourinclinations (our tangible and intangible needs). The principle of microeconomics that holds thata rational firm will shut down the plant when the marginal cost exceeds the marginal revenue ismorally neutral (at least it is to me, but I recognize others, socialist or critical legal theorists, forexample, may disagree). The moral questions, on the other hand, are: At the time reality com-pels your action, are the employees persons or things to you? How do you handle the layoffs?Do you provide outplacement? Is the severance sufficient? Have you developed your employ-ees so that they have transferable marketable skills?

The "rules of the deal" are one thing. Harder cases, like the oxymoronic subject of the "rulesof war" (e.g., Abu Ghraib, acceptable collateral damage, the role of evil, good or absent inten-tion when great harm is inflicted) are another. The issues are related, but discussing them heretrivializes the real issues of evil. For a far better discussion of that issue, see NEIMAN, supra note1. For a libertarian parsing of a purely utilitarian approach to using others as instrumentalities,see ROBERT NOZICK, ANARCHY, STATE AND UTOPIA 35-42 (1974).

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contingency and contracts: a philosophy of complex

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